Standing Committee D

[Mr. John Bercow in the Chair]

Clause 277

Expenses of circulation

Amendment moved [this day]: No. 337, in clause 277, page 127, line 36, at end add
‘as certified by the company's auditors from time to time.’.—[James Brokenshire.]

John Bercow: I remind the Committee that with this we are discussing the following amendments:No. 240, in clause 299, page 134, line 44, leave out ‘public’.
No. 241, in clause 299, page 135, line 4, leave out ‘in complying’ and insert
‘incurred in printing and distributing a statement so as to comply’.
No. 242, in clause 299, page 135, line 7, leave out paragraph (b).

James Brokenshire: I was debating the slightly different approach to cost in clause 299, “Expenses of circulating members’ statement”, in the context of a general meeting. The costs in that clause appear to be tied to the requirement to print and distribute the relevant statement.
In the context of clause 277, what protection does there need to be in respect of expenses that might be charged to a member for the cost of circulating the relevant statement or resolution? In simple terms, the amendment would ensure that there are checks and balances, that members are not taken advantage of, and that costs that are not reasonable are not required to be paid to or by members as a precondition of the circulation of a resolution or a statement.
Clause 288 appears to contain the power of a member to call a meeting at the company’s expense which, although I appreciate that it is not the same, touches on similar issues in terms of the ability to require the convening of a general meeting which could be used for the purposes of considering a resolution. In relation to clause 288 the reverse appears to apply, and shareholders may convene a meeting at the company’s cost without having any expense in those circumstances.
The amendment seeks clarification of the issue of expense generally. If shareholders are obliged to meet the costs—I can see that they might be, to ensure that the company is not prejudiced or disadvantaged—there should be appropriate methods of ensuring that they can be checked, audited or measured so that shareholders do not have to bear inappropriate costs.

Margaret Hodge: The purpose of amendment No. 337 is to ensure that a company does not ask the members requesting the circulation of a written resolution to put in a bill for what would be unreasonable expenses. The measure is unnecessary, and I shall tell the hon. Gentleman why. First, as he knows, not all companies need have auditors, and in the terms of the amendment as drafted, such a company would have to appoint someone because its members wanted to circulate a resolution. That would be a significant burden on business.
Secondly, if the directors asked for an unreasonable sum before circulating a resolution, they would not be complying with the relevant provisions, so they would be committing an offence. As that is within the framework of the legislation, further protections and safeguards are unnecessary. I am sure the hon. Gentleman would accept that the expenses incurred are minimal or relatively small. They certainly do not justify the costs of auditing, so I hope he will withdraw the amendment.
Clause 299 makes provisions for how the expenses for a members’ statement should be covered. Subsection (1) gives members of a company a new right to have a statement relating to an annual general meeting circulated at the company’s expense if their request is received in appropriate time before the end of the financial year preceding the meeting. The provision applies only to public companies, because only public companies are required to hold AGMs. It would not be appropriate to apply the requirement to private companies, as amendment No. 240 would do, as we will no longer require private companies to have a statutory AGM.
Clause 299(2) sets out what should happen when the criteria for a members’ statement being circulated at the company’s expense are not met. I am not sure from what the hon. Gentleman said what costs he is seeking to prevent a company from claiming. The expenses of complying with clause 298 are simply those of circulating the statement. In any event, the amendment fails to take into account electronic communications, which may mean that the company does not incur printing costs but only relatively minor costs through e-mailing people. An unintended consequence of the amendment could be to deter companies from using cheaper forms of communication such as e-mail because they want to be sure of claiming back costs.
Clause 299(2) also contains a provision whereby if the criteria for a statement to be circulated at a company’s expense are not met, the company is let off circulating it if members have not tendered sufficient costs to meet the expenses. To remove that provision would simply encourage the occasional frivolous or disruptive request for the circulation of material. Members requesting a statement will be able to claim back their money if the general membership resolves that the company should pay.
The hon. Gentleman referred to clause 288, which provides a remedy for members when directors fail to call a meeting at their request. In those circumstances it is appropriate to require the company to pay expenses for members. I hope that, with those explanations, he will withdraw the amendment.

James Brokenshire: The Minister’s main point was that if companies seek to misuse the provisions on members’ statements by adding costs, they will be committing an offence. That was her most powerful argument and a valid point, and it is good that it is on the record. The message will be sent that if somebody seeks to use the provisions to add inappropriate costs as a means of disincentivising shareholders from exercising their rights, that will be an offence and will carry commensurate sanctions. In the light of that powerful argument, it would be wrong for me to detain the Committee further.
If a company has a large shareholder base the cost of sending of hard copies might not be huge but could be significant. I hear what the Minister says about that and on sanctions. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 277 ordered to stand part of the Bill.

Clause 278

Application not to circulate members’ statement

Question proposed, That the clause stand part of the Bill.

James Brokenshire: I have just one small point on the clause. We touched this morning on a company’s right to apply for relief in the event that clause 275, on members requiring the circulation of a written resolution, is abused. Such an application can be made by a company or
“another person who claims to be aggrieved”.
How wide is that intended to extend? Will anyone who feels aggrieved have locus standi? What is the ambit of that provision?

Margaret Hodge: That reference in clause 278 mirrors the general meetings provisions in clause 300, which is entitled “Application not to circulate members’ statement”. So those words are just a restatement of the provisions in clause 300. But the answer to the hon. Gentleman’s specific question is yes.
May I take a slight liberty? This morning, I made an error, which I would like to correct, if I can. During the exchange on clause 271, there was a slight confusion. The hon. Gentleman asked whether the Bill would allow a company to use its articles to override the written resolution procedures for statutory resolutions. I think that I answered yes, but apparently the answeris no.

Mark Hunter: It was close.

Margaret Hodge: There were two possible answers, so I had a 50 per cent. chance of getting it right, but I got it wrong.
It is important for the decision-making procedures of a company that the articles cannot create alternative written resolution procedures or require meetings. That is the effect of clause 283. That is quite different from the ability of companies to entrench provisions in their articles, as we discussed earlier. For example, if a company wishes, on the agreement of all its members, to entrench higher than the 75 per cent. majority, it may do so. However, it is important for the protection of minority shareholders that the articles cannot require statutory resolutions to be taken in a meeting. Otherwise, it would limit the rights of members to require the circulation of written resolutions and accompanying statements on a number of key matters, and remove a particularly important new right for a member of the scheme.

James Brokenshire: I am grateful for the clarification on clause 271. Outsiders watching these proceedings can be sure that we are clear about the ambit and operation of that clause in the context of clause 283—the clause to which I was referring in our earlier debate.
I heard what the Minister said about the ambit of clause 278. In essence, it covers anybody who might be interested, and therefore is fairly wide-ranging. I do not know whether further clarification is on offer, but it does not sound like it. On that basis, I am content with what she said, and shall not press the matter.

Question put and agreed to.

Clause 278 ordered to stand part of the Bill.

Clause 279

Procedure for signifying agreement to written resolution

James Brokenshire: I beg to move amendmentNo. 228, in clause 279, page 128, line 4, leave out ‘acting’ and insert ‘duly authorised to act’.
Clause 279 deals with the procedure for signifying agreement to a written resolution. Again, this is a probing amendment seeking clarification on how that would take effect. Under the provisions, a member is deemed to be bound
“when the company receives from him (or from someone acting on his behalf) an authenticated document...identifying the resolution...and...indicating his agreement”.
Authentication appears to relate to the document, rather than to its execution. I therefore want to probe in relation to the protections that might be afforded to ensure the avoidance of any potential for fraud or for a person to intercept and return an authenticated document—purportedly on the shareholder’s behalf—on which, it appears, the company could be automatically reliant.
Obviously, we are entering a new and different world, with e-commerce and the use of electronic signatures. Subsection (4) says:
“A written resolution is passed when the required majority...have signified their agreement”,
but subsection (3) says that once something is signified it “may not be revoked.”
The issue is slightly technical, but the purpose of the amendment is to say that the person is duly authorised to act on the member’s behalf, so as to make it clear that there must be some formal authorisation.
Traditionally, that has been done through such means as power of attorney or other appropriate legal methods. However, the company should not be able merely to accept the receipt of a document on behalf of another person without a requirement to check that that person has been duly authorised to execute the document on the other person’s behalf. We need to ensure that there is proper execution and that such provisions are not capable of being misused. I hope that the Minister can clarify the manner in which authorisation is to be provided and give some reassurance that the system cannot be misused in some way.

David Howarth: Does the hon. Gentleman mean through the amendment to exclude the possibility of the company taking apparent authority to be enough? Is it his view that there should have to be actual authority?

James Brokenshire: I am probing on that issue more than anything else, in trying to ensure that we are clear on whether a company can rely on the power of authority or whether it should have to rely on actual authority and be under a duty to check. Having received a document that is purported to carry the authority of the member, can the company rely on that automatically? That is intent of the existing drafting of the Bill, but the purpose of the amendment is to probe that and ensure that we are striking the right balance.

Margaret Hodge: I am reflecting on what on earth apparent as opposed to actual means—no doubt I am going to get a lesson in law, as I presumably have less than a 50 per cent. chance of getting that one right.
An amendment on evidence was raised in another place, albeit in relation to companies’ communication, so I shall respond in a similar way. The clause sets out the procedures for signifying agreement to a written resolution. The provision allows for either the member or someone acting on their behalf to signify that agreement. The problem that the amendment tries to address is that people could try to signify agreement on someone else’s behalf without having the proper authority.
In fact, we have dealt with the issue elsewhere in the Bill. We considered those points when the Opposition raised a similar theme in another place and as a result we clarified the requirements for authentication. Clause 798(4) allows companies to make provisions in their articles for requiring reasonable evidence of the authority of someone acting on behalf of a member. Given that position, I hope that the hon. Gentleman will withdraw the amendment.

James Brokenshire: I thank the Minister for her response. In essence, companies are to deal with the matter case by case, as they decide whether to put relevant provisions into their articles under clause 798(4), which states that
“nothing in this section affects any provision of the company’s articles under which the company may require reasonable evidence of the authority of the former to act on behalf of the latter.”
The point that I could make on that is that there has to have been entrenchment in the articles. A different approach would have been codification, whereby companies would automatically have that right. Nevertheless, I understand where the Minister is coming from, and if there is the flexibility to ensure that companies can take such steps, that is helpful in answering the point that I flagged up. On the basis of her response, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 279 ordered to stand part of the Bill.

Clauses 280 to 285 ordered to stand part of the Bill.

Clause 286

Members’ power to require directors to call general meeting

James Brokenshire: I beg to move amendmentNo. 231, in clause 286, page 129, line 30, leave out from ‘10%' to end of line 37.
Clause 286(3) states that 10 per cent. of members are needed to require directors to call a general meeting. The clause then states a number of exemptions that appear to apply to private companies, which are not currently reflected in section 368 of the Companies Act 1985. Essentially those exemptions seem to allow the lower percentage of 5 per cent. in the event that someone has already used the right in clause 286(4) in the 12 months since the end of the previous general meeting. I am trying to understand the thought processes behind those provisions and to ascertain whether there is a risk that the additional provisions in subsections (3)(a) and (b) may in any way encourage continual requisition by shareholders.
Obviously, there are provisions relating to relief, but the question is whether the additional language could in any way be misused to encourage continual requisition. I should also appreciate clarification on what paragraph (b) is actually driving at, and on the problems, errors or risks that it seeks to address. It was the absence of such clarification that led us to table the amendment.

Margaret Hodge: I was hoping to cover these issues this morning in relation to an earlier amendment, but that was withdrawn. This is a flip-floppy bit of amending by the Opposition. I say that particularly because their representative in the House of Lords, Lord Hodgson of Astley Abbotts, moved amendments at every stage to reduce the thresholds from 10 to 5 per cent. To pick just one quote, he said:
“The Government are wrong not to accept a 5 per cent. threshold because, if a company has nothing to hide, there is nothing to fear. In the circumstances, 5 per cent. is still a pretty high barrier.”—[Official Report, House of Lords, 27 February 2006; Vol. 679, c. 59.]
I could give other quotes, but in the interests of speed and getting through the business before us, let us leave it at that.
The amendment would reverse the one that was pressed for in another place. The rationale behind that amendment was that, in the absence of a statutory annual general meeting, we needed to make it easier for members of a private company to call a general meeting to hold their directors to account. Opposition Members in the House of Lords attached great importance to that on the grounds of
“shareholder rights, shareholder democracy and protection of minority shareholders.”—[Official Report, House of Lords, 27 February 2006; Vol. 679, c. 59.]
We understood those concerns and felt that members should have a voice in the company’s decision making, but we saw no justification for imposing potentially significant administrative and cost burdens on public companies, given that it will be a statutory requirement for them to continue to have a voice at the AGM. That is why we introduced the alternative threshold for private companies and reduced it from 10 to 5 per cent. of voting rights. In that context, members will have that right only once a year—it is not a continuing right—and 12 months must elapse before they can reconvene on the 5 per cent. basis.
I am not quite sure where Conservative Members are coming from, but I hope that they will continue to champion for shareholder rights, shareholder democracy and the protection of minorities, which we shall be discussing later, and that they will not pursue the amendment.

James Brokenshire: I am always delighted to debate the protection of shareholder rights and I look forward with alacrity and interest to further debates on the subject.
As I said, the purpose behind the amendment is to obtain clarification of the intent behind the wording of clause 286(3) to ensure that it cannot be open to abuse and that it strikes the right balance, ensuring that the interests of shareholders and members are properly protected, while not inappropriately disadvantaging the company. The Minister’s comments are helpful in assuring us that the provisions are not open to abuse, that they will provide private limited companies and their shareholders with flexibility, and that minority shareholders’ interests will be protected. In the light of that clarification, I am pleased to say that I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 286 ordered to stand part of the Bill.

Clause 287 ordered to stand part of the Bill.

Clause 288

Power of members to call meeting at company’s expense

Question proposed, That the clause stand part of the Bill.

James Brokenshire: The clause relates to the power of members to call a meeting at the company’s expense, thus enabling shareholders to requisition a general meeting. My question is about subsection (7), which deals with the provision under which reasonable expenses must be reimbursed by the company. The subsection refers to “fees or other remumeration” and states:
“Any sum so reimbursed shall be retained by the company out of any sums due or to become due from the company by way of fees or other remuneration in respect of their services to such of the directors as were in default.”
In other words, if the company has to pay money to shareholders, it can then deduct such sums from the defaulting directors who did not comply with the clause. Again, reference is made to fees or other remuneration, so the provision appears to relate to sums that may be payable directly to individual directors.
My question is what happens in the circumstances of a contract for services, such as when the services of a director are provided through a service company, and therefore payment is directed to that company rather than directly to the individual. Are such circumstances covered, so that the company could deduct the relevant sums from any charges that might be payable by the service company, as contrasted with any “fees or other remuneration”, a term that relates to an employment-type arrangement? Really my question is about whether the clause is wide enough to cover such eventualities.

Margaret Hodge: I think that the answer is that I shall write to the hon. Gentleman.

Question put and agreed to.

Clause 288 ordered to stand part of the Bill.

Clause 289 ordered to stand part of the Bill.

Clause 290

Notice required of general meeting

James Brokenshire: I beg to move amendmentNo. 338, in clause 290, page 131, line 33, at end insert—
‘(2A) In calculating the time periods referred to in subsections (1) and (2), the date of issuance or publication of the notice and the date of the general meeting shall be disregarded.'.

John Bercow: With this it will be convenient to discuss amendment No. 340, in clause 295, page 133, line 23, at end add—
‘(5) In calculating the time periods referred to in this section, the date of issuance or publication of the notice and the date of the general meeting shall be disregarded.'.

James Brokenshire: We now move on to the notice periods required for general meetings. Under clause 290, general meetings can be convened on 14 days’ notice, or, in the case of an annual general meeting, at least 21 days’ notice. The amendments raise the exciting point, which is often debated in relation to time periods for general meetings, of what we mean by days. I know that it sounds all very arcane, but corporate lawyers have such esoteric debates about meanings in the articles. I can see that hon. Members are rapt by the potential of the debate.

David Howarth: Sad but true.

James Brokenshire: The hon. Gentleman is right. The not necessarily happy hours spent on having these sometimes awkward debates are, thankfully, nearly expunged from my memory.
Normally a company—particularly a plc, for which the issue is significant—must provide in its articles that in calculating x days’ notice, no account will be taken of the day of the sending out of the notice, or the following day, which relates to receipt of the notice, or the date of the meeting itself. I recognise that there appears to be nothing in the Bill to deny a company the great pleasure of having a lawyer draft such provisions into its articles. Indeed, clause 290(3) specifically contemplates that possibility.
I want to know whether we can save companies the cost and expense of the extremely exciting process of encapsulating such provisions in their articles by being very specific and clear about setting out the notice period of 14 or 21 days, although I recognise that my amendment may not be perfect. This obviously becomes more germane in as much as the normal notice period of full resolutions is now being reduced to 14 days in almost all circumstances. Therefore the time periods may become more critical.

Jonathan Djanogly: My hon. Friend makes a good and practical point. Clause 292 refers to 21 and 14 days. In practice, it is 24 days and 17 days, and so it is unclear without the amendment.

James Brokenshire: My hon. Friend makes a fair point. It is these detailed and practical issues that practitioners on the ground have to get to terms with. Therefore, the amendment aims to give some clarity and to ensure that these rather detailed provisions are simplified in some way. We are codifying the provision on the face of the Bill. It is entirely possible that there is a subsection buried in its remaining parts which I have yet not discovered during my bedtime reading. I am sure that the Minister will point it out to me with great alacrity if there is. Indeed, I hope that that is the case. Amendment No. 340 makes the same point in the context of clause 295 in respect of special notices. I look forward with excitement to the Minister’s response.

Margaret Hodge: I know that the issue is dear to the hearts of many lawyers, some of whom are members of the Committee. Table A mentions notices of meetings and refers to clear days. That means that its wording is certainly in line with what the amendment suggests. The Companies Acts, by contrast, have never referred to clear days. I am told that this has been settled law in England and Wales since a case in 1935. In that very leading case, the judge said that he did not think there was any doubt about the position. Consequently, we did not think that the amendments were necessary. However, just to make the hon. Gentleman feel really good, if he feels strongly and thinks that they substantially clarify the point, I do not have a problem with taking them away and seeing whether we can put them in the Bill.

James Brokenshire: I am actually quite excited by the Minister’s response, sad lawyer that I am.

Jonathan Djanogly: My hon. Friend has invoked a memory from the back of my head that if one follows the clear days’ path in the articles, it is three extra days, and if one follows the path through the statutory route, it is two extra days. I see nods from civil servants. I think my hon. Friend is saying that it would be easier if we simply said what it was and then everybody would be clearer.

James Brokenshire: I am grateful to my hon. Friend for that timely, learned and detailed intervention. While it may seem a trivial point, quite a lot of time can be taken up during a flotation, or something like that, finding out what the admission date is likely to be to ensure that things have been properly adhered to. There may be some merit in trying to put something in the table A articles. That might be the most appropriate way to clarify what is meant by clear days.

Jonathan Djanogly: Another memory is triggered: I do not have the statistics to prove this, but it is probably the most common way in which notices are got wrong. It happens frequently with great embarrassment for all parties.

James Brokenshire: Again, I am grateful to my hon. Friend. In light of that and in view of the Minister’s generous offer to look at this point, which appears to be quite minor, but can have various consequences in practice, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 290 ordered to stand part of the Bill.

Clause 291 ordered to stand part of the Bill.

Clause 292

Publication of notice of meeting on website

James Brokenshire: I beg to move amendmentNo. 238, in clause 292, page 132, line 25, at end insert—
‘(d) be communicated directly to the member either in electronic form or in hard copy form.'.
The clause provides flexibility for a notice of a meeting of shareholders to be provided in a different way from the common method of sending out a hard copy notice through the post to members of a company. I welcome the flexibility that is now embodied in the Bill. Its recognition that practice has moved on and that the way business is undertaken more generally has changed with the use of e-commerce to facilitate notifications, trade and so on is to be applauded.
The purpose of the amendment is to gain some clarification on the concept of publication of notice of a meeting on a website. There is some residual concern—I know that this issue was touched on in the other place—about members needing to receive a physical notification that something has gone up on a website. An additional step has to be undertaken so that shareholders are not expected to have to go to a company’s website on a daily basis to see whether something has been put there.
The Investment Management Association states that clause 292(2)
“indicates that the company has a duty to notify its members of the existence of the notice on its web site but it is not clear how such a notification is to take place. We believe it is important that companies notify their members directly that they have published the notice and that it should be clarified how this should be effected. We would be concerned if it was merely sufficient to put the notice of the meeting on the web.”
The purpose of amendment No. 238 is to probe and seek some further clarification for all interested parties of what is envisaged in practice here. Notification is understood, but some clarity is needed to ensure that members are properly notified and that there is no lacuna. I do not think there is, but some clarification is needed.

Margaret Hodge: As the amendment stands, there would be an unintended consequence, which is that members could not be notified by telephone. The amendment would limit the flexibility. I agree entirely with the hon. Gentleman’s sentiment that members should be notified by a company when a resolution or a notice of a meeting is put on a website. Members cannot be expected to check the website just in case the company has suddenly called a meeting or if information has suddenly been posted. That is why we have imposed a requirement in the communications provisions.
Clause 795(2) and paragraph 13 of schedule 6, or paragraph 16 of schedule 7, place a requirement for companies to notify intended recipients directly of the presence of documents and information as sent, in the Bill’s language, by means of a website. That includes all written resolutions, notices and meetings, so we think that there is no need to double bank it.

James Brokenshire: I am grateful to the Minister for placing on the record the direct cross-references to which the point relates, because with a Bill of this length I wonder whether the reader, who might already be nodding on reaching the clause, would make it through the schedules—he might be struggling somewhat. Therefore, a direct cross-reference to those provisions is helpful.
Indeed, I know that in other parts of the Bill provisions state, “See section x,” so in that context might it be considered appropriate to carry out cross-referencing of some sort to the schedule so that it is absolutely clear for the reader that those more detailed provisions are in the schedule to give some assurance?
I note that the Minister referred to notification by telephone in relation to posting a notice on the website, which is an interesting development that needs some consideration. It is a different approach from the manner in which business has been undertaken in that regard. I see the arguments in terms of flexibility. The only cautionary note that I would sound is as to whether, evidentially, there may be issues such as someone saying, “Well, we telephoned you,” whereas no record may have been left of whether such a notice or a telephone call had been made.
I understand that the need for flexibility is laudable in terms of providing that basis and background, because we clearly want to ensure that businesses are not unnecessarily prescribed in how they conduct their business while at the same time ensuring that appropriate protections are put in place to ensure that provisions cannot be misused.
I do not know whether the Minister, who is clutching a piece of paper, wants to say anything further in that regard.

Margaret Hodge: If it helps the hon. Gentleman, a telephone could be used with the member’s consent, but I was using that illustration to show the flexibility that we want to retain rather than prescribe. While I can look at cross-referencing, it has rightly been drawn to my attention that the Bill has already grown in length beyond anything we all envisaged when we embarked on the review eight years ago. We can provide cross-referencing. The problem is that there would probably be cross-referencing right across the Bill, which would add hugely to the number of pages.
I can look at the issue, but reflecting even on our discussion this morning, there are probably instances where we have already missed the potential for cross-referencing. There will always be that difficulty in a Bill of this size.

James Brokenshire: I am grateful for the Minister’s reply. Yes, the Bill has grown, but we had hoped that it would be the appropriate length when we began, rather than growing through the process. However, I shall put that issue to one side.
The Minister’s comments on shareholders consenting to receive notification by telephone is the key issue: if consent has been provided, the important thing is that there is an understanding almost by contract between the company and its shareholders as to how, individually, notification should be received to cover such issues.
I hope that that clarification and debate are helpful to people outside the room who have expressed concerns as to what this will mean in practice for the notification provisions. In the context of the Minister’s comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 292 ordered to stand part of the Bill.

Clause 293

Persons entitled to receive notice of meetings

James Brokenshire: I beg to move amendmentNo. 339, in clause 293, page 132, line 32, at end insert
‘and
(c) any auditors of the company.'.
This is another probing amendment. Section 381 of the 1985 Act contemplates auditors being notified of a written resolution. There was thought to be merit in the auditors being involved in the process, given that they will want to be actively engaged with the company in the context of their audit. They should know when resolutions are sought to be passed, particularly when we are talking about issues such as share capital reorganisations. From an audit perspective, there is a need to know that a meeting has been properly held or convened and that a resolution has been properly passed. The amendment probes why it was felt that such a notification requirement might not be appropriate.
I acknowledge that auditors are not required to receive formal notification of meetings, although in practice I think that they probably would, but they are under the written resolution approach in the section that I mentioned. This is a general point about continuing engagement by the auditors to ensure good standards of corporate governance. I shall not press the amendment to the vote, as it is probing and intended to find out why the auditor’s requirement to be notified has been relaxed in certain provisions. I look forward to the Minister’s response.

Margaret Hodge: I do not think that the hon. Gentleman’s bedtime reading has got him to clause 492(2). When he gets there, this is what he will find:
“A company’s auditor is entitled to receive all notices of, and other communications relating to, any general meeting which a member of the company is entitled to receive, to attend any general meeting of the company, and to be heard at any general meeting”.
So really, there is no need for the amendment as it would simply duplicate provisions that we have elsewhere.

James Brokenshire: I am grateful for the Minister’s response. As I said in an earlier debate, it is entirely possible with a 900-clause Bill, which we are all spending happy hours reading, that a clause might occasionally pass one by. I am grateful for the confirmation of the importance and continuing role of auditors in this context. I am delighted that that has been properly reflected and acknowledged in the Bill. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 293 ordered to stand part of the Bill.

Clause 294

Contents of notices of meetings

Question proposed, That the clause stand part of the Bill.

James Brokenshire: The clause deals with what needs to be included in the notice of meeting. Obviously, that is the time, place and date and so on. The issue that I raise concerns proxies. Other provisions deal with the requirement to give notification of proxies and of the right to appoint one to attend the meeting in one’s stead, which is an appropriate thing to be pointed out to shareholders. I therefore want to be clear that the clause and the provisions relating to proxies are to be read together, rather than in isolation, and that stating that the contents of a notice of meeting are as set out in the clause in no way overrides or undermines the following-on provisions that relate to the appointment of proxies, the requirement for companies to specify that right and the last time for appointment of that right.

Margaret Hodge: That is the intent, and on the basis that we have translated the intent into the provisions, the answer must be yes.

Question put and agreed to.

Clause 294 ordered to stand part of the Bill.

Clause 295

Resolution requiring special notice

Question proposed, That the clause stand part of the Bill.

James Brokenshire: One small point: subsection (1) refers to “the Companies Acts”. There was a small debate in the other place about that reference, in which Lord Sainsbury said:
“This is referring not to any previous Companies Act, but to the Companies Act which we are talking about.”—[Official Report, House of Lords, 1 March 2006; Vol. 679, c. GC122.]
I was slightly lost when I read that reference. My reading is that “Companies Acts”, the plural, would under normal circumstances suggest previous legislation. If what Lord Sainsbury said is correct—it is possible that this was picked up on later in the Lords debate, but unfortunately I have obviously not picked up on it—the reference should be to the Bill. If it means previous Acts, it should be somewhat clearer. I would be grateful for clarification.
There is also an issue concerning consolidation. I would hope that the phrase is a reference to “the Act”—as it will grow and be consolidated—so that there is no need to cross-refer back. I would therefore appreciate some clarification from the Minister on whether we are talking about Acts in the plural or an Act, singular.

Margaret Hodge: I have a copy of the Hansard of the debate that took place on that issue in Grand Committee in the Lords. I understand the confusion that arose from it, so let me clarify that we are talking about the Bill, which will become an Act. For clarification, there is no duplication at all.

James Brokenshire: In the light of the Minister’s comment, might I prevail on her to talk to her officials about whether it is possible to table a minor amendment on Report—I am happy to draft it, if appropriate—to indicate that the Act is meant, rather than the Companies Acts? Although I appreciate the clarification that she has given, not everyone picking up the Bill, which might become an Act, will have that insight, so some further clarification and detail would be helpful.

Margaret Hodge: I look forward to the hon. Gentleman’s drafting, which will be known—I am not sure that I am allowed to use names—as the Brokenshire amendment.

Question put and agreed to.

Clause 295 ordered to stand part of the Bill.

Clauses 296 to 302 ordered to stand part of the Bill.

Clause 303

Declaration by chairman on a show of hands

James Brokenshire: I beg to move amendmentNo. 243, in clause 303, page 136, line 7, at end insert—
‘(1A) The chairman must demand a poll when he considers that the outcome would be different from that reached on a show of hands.'.
The amendment would insert additional wording into the clause so that the chairman must demand a poll when he is aware that the outcome of the decision or vote will be different from that reached on a show of hands. Its purpose is to clarify that the chairman’s duty is always to demand a poll when he or she is aware that the outcome would be different from that reached on a show of hands.
We touched on that briefly en passant this morning in relation to other clauses. Under regulation 46 in table A of the Companies (Tables A to F) Regulations 1985, a resolution voted at a company meeting is decided on a show of hands—one vote per member for each shareholder present or, in the case of a corporate shareholder, represented, but not proxies, unless the articles provide for that—unless a poll, which is a ballot of members on the basis of one vote per share, is called. Common law has clarified that the chairman’s duty is to ascertain the true sense of the meeting. When the chairman’s proxy is aware that if a poll were called the outcome would be different from that reached on a show of hands, he has a duty to demand a poll if he can do so under the company’s articles of association. Guidance from the Institute of Chartered Secretaries and Administrators emphasises that duty.
The Investment Management Association highlighted a case when that approach was not followed. It cited the annual general meeting of GoshawK Insurance Holdings, a re-insurer, when an advisory resolution on the remuneration of the chairman was decided on a show of hands and a poll would have defeated it. The Investment Management Association suggests that in such circumstances the chairman would have been more appropriately advised to call a poll. I cannot comment on that in detail, nor can I say whether that was appropriate, but I am sure that the company sought appropriate legal advice and that it acted in a way that it thought was appropriate.
That raises an issue of when claims or counter-claims might be made in that context, and whether something was done appropriately or whether a poll should have been called. The amendment seeks to clarify and codify. It is interesting that the Investment Management Association stated in its briefing note:
“We consider it important that the law in this area is clarified and that the current Company Law Reform Bill is an opportunity to address this. As proposed...it should be clarified that the chairman’s duty is always to demand a poll when he is aware that the outcome would be different from that reached on a show of hands, regardless of whether the vote is binding on the company.”
Against that backdrop, I commend the amendment to the Committee.

Margaret Hodge: There is a common law duty on the chairman to demand a poll on a vote if he considers that the outcome would be different from that reached on a show of hands. We do not see any justification or advantage in attempting to codify that in the way suggested. Let me explain why. The Bill sets out the rules for how companies take decisions, but it does not claim to be a comprehensive code. Some things are still dealt with under the general common law of meetings, which applies to all sorts of meetings, not only company ones.
Part 13 also leaves a lot of flexibility for companies to deal with such matters in their articles. I am sure members of the Committee accept that that flexibility is an important feature of the United Kingdom corporate governance structure—all the more so for the large majority of small private companies to which the provisions also apply. The whole issue of voting at general meetings was subject to extensive consultation by the company law review. Despite the view of the Investment Management Association, which clearly has advised some members of the Committee, we found that there was not a consensus on change under the existing provisions.
The company law review found that practice can evolve rapidly. It saw a case for developing good practice guidance in polls, but noted that there was already a common law requirement governing the calling of a poll on resolutions likely to prove contentious. It is for the chairman to control the meeting and for the shareholders at the meeting to approve his appointment as chairman. There is no good reason for legislative intervention in the relationship between the chairman who, most likely, is also a director or a shareholder, and the other shareholders at the meeting.
All shareholders, whether voting in person or by proxy, have the right—under clause 304(2), it only requires five of them—to demand a poll on resolution. Furthermore, if the shareholders consider that the chairman has acted improperly or out of order, they may seek remedy under clause 157, which requires the directors to act in accordance with the company’s constitution. Section 459 of the 1985 Act would enable a member or group of members to claim against the company on the grounds that the company’s affairs had been conducted in a manner that was unfairly prejudicial to their interests.

James Brokenshire: Obviously, the issue in dispute is whether a different legal approach is developing as a matter of law or practice in respect of advisory resolutions compared with resolutions that are not advisory. As I said earlier, and to which the Minister responded, the common law duties on a chairman are clear in circumstances in which he or she is aware that a poll may lead to a different result. I understand the right hon. Lady’s reluctance to intervene by codifying things when that common law duty is understood.
The position that concerns us relates to advisory resolutions, because the law on that is still developing, but in the light of the Minister’s comments and the need to obtain consensus and general practice on what is appropriate in developing law, it would not be right for me to pursue the amendment. I am sure that there will be continuing debate among practitioners and corporates as a whole on whether advisory resolutions have different status in the context of corporate law. If there were a dispute, I am sure that the courts would rule on it appropriately in due course. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 303 ordered to stand part of the Bill.

Clause 304

Right to demand a poll

James Brokenshire: I beg to move amendmentNo. 244, in clause 304, page 136, line 18, leave out paragraph (b).
The clause touches on the issues that we have just debated and relates to the right to demand a poll. Clause 304(1) states that a company’s articles will be void if they seek to exclude the right to demand a poll save in two circumstances, which are
“the election of the chairman of the meeting”
or
“the adjournment of the meeting”.
Amendment No. 244 questions the latter point. The adjournment of a meeting can be an important issue, and I can think of cases when the subject of whether a highly-charged meeting should adjourn has been quite significant. In those circumstances where things are in the press and the situation is volatile or charged, delaying something by virtue of granting an adjournment can have a significant impact on public companies. Its share value might be affected if the delay and uncertainty continue, and so an adjournment, if granted, could tilt the balance in favour of one outcome or the other.
The amendment questions the right for a poll to be refused for the adjournment of a meeting if that is encompassed within the articles of association. It is obviously possible in practice that a company, as a public company, might not take that provision in any event, because of procedure and the general practice that arises in the corporate world. It is worth underlining that point about the potential impact that might arise if an adjournment is called and is successful, or, indeed, if it is unsuccessful. There is certainly some merit in allowing a poll to be called in such circumstances.

Margaret Hodge: I am afraid that I cannot agree with the Conservatives. The amendment is identical to one that was tabled in the House of Lords, and I shall repeat what was said there. I think they are worried that a company could frustrate a group of shareholders who might have made special arrangements to attend a general meeting by proposing an adjournment of the meeting and forcing it through.
The effect of the amendment would be that enough members acting together could require a poll on a vote to adjourn the meeting. In our view, that would be a disruptive change for the broad range of companies that have taken advantage of the current position, and it could well frustrate the majority of members who turn up to attend the meeting. There is nothing to stop members appointing proxies to attend meetings in their place if it is difficult for them to attend in person. We have discussed that already. As the hon. Gentleman knows, we have used the Bill to extend proxy rights so that proxies always have the right to speak, and not only at private company meetings. We feel that the amendment is unnecessarily cumbersome and bureaucratic, and urge the hon. Gentleman to pay heed to the debate that took place in the other place and withdraw his amendment.

James Brokenshire: I am aware that the subject was debated in the other place, and I have revisited the point because it is important in achieving certainty in the corporate arena. It sits somewhat unhappily with our previous debate about the chairman’s duty in normal circumstances under case law to call a poll if he or she believes that the outcome of a poll would be different from the outcome on a show of hands. I hear what the Minister has said and I note that the matter was debated in the other place. She has indicated clearly that she will not give ground and it would therefore be inappropriate for me to delay the Committee further. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 304 ordered to stand part of the Bill.

Clauses 305 and 306 ordered to stand part of the Bill.

Clause 307

Rights to appoint proxies

Question proposed, That the clause stand part of the Bill.

James Brokenshire: I seek a couple of points of clarification. The first is on a matter which we touched on earlier, but I am not sure whether I couched it in the form of a question. Will it be possible for a company member to attend a general meeting and appoint a proxy at the same time by splitting his entitlement to allow the proxy to use some of his shares? If so, a member could bring along his professional advisory team by appointing them as proxies, which would give them speaking rights and so on at the meeting. That is not currently the case.
The other issue, to which I am sure we will come back when we debate nominee shareholders, is the number of proxies that can be appointed in relation to one shareholding. I assume that if someone holds 100 shares, he should technically be able to appoint as many proxies as he likes based on the reference in clause 307(2) to the number of shares or £10 multiples of stock held. There is therefore the potential for a large number of proxies to be appointed under one shareholding. That may be appropriate in the context of the debate that we will have on nominee shareholders and their rights, but it could be subject to abuse. Does the Minister have any thoughts on that?

Margaret Hodge: I look forward to our discussions on nominee shareholders. As I told Conservative members of the Committee outside the Room, we are trying to resolve the matter with all parties concerned so that we can suggest a way of operating that commands broad consensus from those involved. We are close to doing so.
There is nothing to stop a member appointing a proxy and attending a meeting himself. If there were a vote, the member’s vote would override that of the proxy. I hope that that covers the hon. Gentleman’s concern. I believe that he also tabled an amendment that was not selected.

James Brokenshire: It dealt with a separate issue: the ability of members to split their holding, not to vote, but to give their professional advisers speaking rights. From what the Minister said, I think that it would be possible for a member to split his entitlement to appoint a proxy and entitle him to attend to speak but not to vote.

Margaret Hodge: That is correct. On the other issue, which we will have to discuss further, under the current law an activist could buy 100 shares in the names of 100 different people to enable him to attend an AGM. If he were intent on disrupting a meeting, he could do so, but he might find an easier way without having to buy 100 shares and appoint proxies. I am not sure about appointing proxies, but in those circumstances, as in the House or wherever similar meetings are held, it is up to the chairman to take a view on how to control any disruption, whether it is caused by members, by proxies or by anyone else.

Question put and agreed to.

Clause 307 ordered to stand part of the Bill.

Clauses 308 and 309 ordered to stand part of the Bill.

Clause 310

Notice required of appointment of proxy etc

James Brokenshire: I beg to move amendmentNo. 342, in clause 310, page 138, line 19, leave out subsection (3).
Subsection (2) sets out the appropriate time periods to appoint a proxy. In normal circumstances, that is 48 hours before the meeting or the adjourned meeting is held. The purpose of the amendment is to clarify subsection (3), which states:
“In calculating the periods mentioned in subsection (2) no account shall be taken of any part of a day that is not a working day.”
My concern is that that may lead to confusion. The practice at present is that 48 hours means what it says. Therefore, if a shareholders’ meeting were to take place at 10 o’clock on a Monday morning, the proxy form would have to be back by 10 o’clock on the Saturday morning—in other words, 48 hours before the meeting. The registrars of plcs are geared up to receive notifications of such matters at the weekend, and although it may not be the most convenient time, it is practical and it can be achieved.
From my reading of clause 310(3), it appears that no account should be taken of any part of a day that is not a working day. Therefore, to take my example of a general meeting at 10 o’clock on a Monday morning, that seems to suggest that the 10 hours before the meeting on Monday morning could be taken into account, but not the hours of Saturday and Sunday, so the remaining 38 hours would have to be calculated counting back from 23.59 on the Friday night.
I wonder whether that is the intention behind the provision as drafted, because it adds complexity to companies’ assessments of the time allowed for the receipt of a notification of a proxy. Indeed, it may also limit the amount of time that a shareholder may legitimately have to arrange for a proxy to be appointed.
The issue becomes even more relevant in the context of our debate on time periods for general meetings. Most general meetings, other than annual general meetings, are held on 14 days’ notice. The time available in which to appoint a proxy is therefore quite tight because the proposal limits even further the time that a shareholder has to identify an appropriate proxy who can attend the meeting on their behalf and to complete and return the appropriate document.
My concern is that the provision appears to change current practice and has the potential to disadvantage shareholders of a company as it affects their ability to get an appropriate appointment notification to the company within the time allowed. I would appreciate clarification as the proposal seems to add complexity.

Margaret Hodge: The purpose and intent of the clause are to do entirely the opposite. The clause is meant to simplify matters. It reflects an implementation of recommendations from the shareholder voting working group, which was conciliated by Paul Myners. We introduced the measure on his recommendation.
The working group’s concern was to alleviate companies and their registrars of the unnecessary burden of having to receive and process proxy appointments over a weekend. The hon. Gentleman understands that under current law, a company must take receipt of a proxy appointment up to, for example, 11 am on a Saturday and process it in time for a general meeting held at 11 am on the Monday. I understand that he wants to protect investors by ensuring that they can appoint their proxies as close as practicable to the time of the general meeting, but we believe that it is not unreasonable, given the working group’s recommendations, to require that proxy appointments are made on working days.
I point out again that the recommendation had the support of the wide group of interests represented in the working group, including investors, brokers, custodians, registrars and companies. Therefore, we believe that this is a sensible measure to decrease the burdens on business.

James Brokenshire: I am grateful for the Minister’s response. In my comments, I recognised that companies, in conjunction with their registrars, would have to bear some administrative burdens to be able to process proxies received at the weekend. Therefore, I understand the sense of the proposal and why it is being advocated. There is always a question of balancing ease of administration for the company with the rights of the shareholders. I again wave my flag for the rights of shareholders. I am delighted to stand up for them.
However, it is clear from what the Minister said that consideration has been given to how to strike the balance and whether the proposal goes too far in one direction. I am gratified that she said that the problem had been examined, considered and consulted on with a wide group of stakeholders. Therefore, in determining whether the proposal is appropriate and in taking account of potentially conflicting interests, I appreciate her clarification. We have also clarified the workings of the clause. In the light of her comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 310 ordered to stand part of the Bill.

Clauses 311 to 316 ordered to stand part of the Bill.

Clause 317

Application to class meetings

Amendment made: No. 105, in clause 317, page 141, line 9, leave out ‘alteration' and insert ‘amendment'.—[Margaret Hodge.]

Clause 317, as amended, ordered to stand part of the Bill.

Clause 318

Application to class meetings: companies without a share capital

Amendment made: No. 106, in clause 318, page 141, line 39, leave out ‘alteration' and insert ‘amendment'.—[Margaret Hodge.]

Clause 318, as amended, ordered to stand part of the Bill.

Clause 319

Public companies: annual general meeting

James Brokenshire: I beg to move amendmentNo. 245, in clause 319, page 142, line 20, at end add—
‘(5) A private company is not required to hold an annual general meeting but section 320 shall apply to a private company if it decides to call an annual general meeting.'.

John Bercow: With this it will be convenient to discuss
New clause 31—Annual General Meeting Of Private Company—
‘A private company is not required to hold an annual general meeting but section 312 shall apply to a private company if it decides to call an annual general meeting.'.

James Brokenshire: Clause 319 makes provision for the procedure to be adopted by public companies when holding annual general meetings. Under the revised provisions, there is no requirement on private companies to hold or convene annual general meetings at all. Traditionally, a private company under the existing regime set out in the Companies Act 1985 can opt out by virtue of the elective resolution route.
Clause 319 will effectively reverse that requirement so that in essence a private company has to opt in when deciding whether to hold an AGM. I note that when that matter was discussed in the Grand Committee debate in the other place, Lord Sainsbury said:
“Our approach in the Bill has been to make no statutory provision concerning AGMs held by private companies. This does not mean that private companies cannot hold AGMs; it means only that the Bill does not provide a statutory regime. The intention is that private companies could write AGM provisions into their articles.”—[Official Report, House of Lords, 1 March 2006; Vol. 679, c. GC128.]
That is obviously absolutely true; private companies could do that.
I am trying to save the legal costs of recreating those provisions in the articles of association of a private company. The Bill might be able to mirror the language referring to public companies by stating that if a private company requires an AGM, the provisions for public companies can apply equally to private companies that elect to take that approach. That would not compel or require private companies to do so, but would avoid the need for them to mirror those procedures or provisions in their own articles of association, which could require some expenditure if they were different from what is contained in table A. The amendment therefore seeks effectively to deem the notice period within the Bill to cover the eventuality of private companies still needing to hold an AGM.
I do not intend to press new clause 31 and therefore will not speak to it.

Margaret Hodge: As the hon. Gentleman confirmed, that issue was dealt with in the House of Lords. As he will know, we see it as part of the Bill’s deregulatory proposals, particularly for small companies, to lift some of the burden that comes with the statutory requirement to hold an AGM.
During our White Paper consultation in July 2002, we published some draft provisions for opting into and out of AGMs. The responses to that consultation showed that people viewed the provisions as confusing and overly complex, which was the opposite of the “think small first” approach that we were attempting to adopt in the Bill. The Government’s view is that we should not legislate for small companies in that regard. 
However, to reassure the hon. Gentleman, I will say that procedures for resolutions at general meetings under chapter 3 will apply to both private and public companies. If a private company wishes to call a general meeting, the notice of meeting provisions under clauses 290 and 296 will apply. Whether it refers to such a meeting as annual is irrelevant for the purposes of the requirements; notice will be given to members. On that basis, and in the spirit of attempting to deregulate a bit and to help lift the burden on small businesses, I urge the hon. Gentleman to withdraw his amendment.

James Brokenshire: I note what the Minister said about not wishing to burden small companies. The amendment would not burden them, because it would not impose any additional requirement on them. It merely seeks to clarify things and make life easier by not requiring companies to reflect such provisions in the articles of association or to incur related costs. However, I know that I am unlikely to obtain any further movement from the Minister on the matter, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 319 ordered to stand part of the Bill.

Clauses 320 to 324 ordered to stand part of the Bill.

Clause 325

Members’ power to require independent report on poll

Question proposed, That the clause stand part of the Bill.

John Bercow: With this it will be convenient to discuss the following: Clauses 326 to 334 stand part.
Amendment No. 207, in clause 335, page 149, line 34, leave out from ‘website)' to end of line 35.
Amendment No. 246, in clause 336, page 150, leave out lines 8 and 9.

James Brokenshire: Thus far this afternoon, we have had some interesting debates on quite detailed and narrow issues of law and practice. They have been of interest, but this matter has provoked wider discussion.
This debate relates to clause 325 and subsequent clauses, which will provide a mechanism for shareholders representing not less than 5 per cent. of the voting capital of a quoted company to demand an independent report on any poll taken or to be taken at a general meeting of the company. The request must be made no later than within one week of the poll being taken, and the directors must appoint an independent assessor within one week of the requirement to prepare a report for the company on the poll or polls.
The Institute of Directors said of the arrangement:
“These provisions are onerous and unnecessary. The Government has provided no evidence of any abuse it is trying to redress. They will place increased costs and burdens on companies for no discernable gain. In addition, in spite of the statement that an adverse report on a poll will not affect the validity of a decision, it is likely that companies would delaythe implementation of the decision until the time for a challenge has expired. In the case of decisions taken at EGMs this could have a seriously detrimental effect on companies’ ability to complete major transactions and would undermine the competitiveness of UK companies.
The procedure of calling for an independent report would be open to serious abuse from those who were opposed to a transaction, but knew that they would be defeated on a poll. They would hope to achieve their desired aim by the back door rather than through the legitimate democratic process of the poll”.
That is a long quote from the IOD. The Minister will be pleased to hear that the CBI is somewhat more succinct and to the point in its comments. It says:
“Clauses 325-334 are excessive and unnecessary and will place increased burdens and costs on companies. They are also contrary to the Government’s aim for deregulation and the principles of better regulation”.
The provisions highlight some strong feelings within the business community as to their need, requirement or necessity and the evil that they are seeking to prevent.
One of the points that was raised by the Institute of Directors was the impact of delay. It makes the point that companies may seek to wait a week before implementing a change for fear that a demand for some sort of report may be required. If that were to be the case it may impose some considerable costs and burdens on the companies. I am minded in that regard of companies that may be doing a share offering where the longer the share offering waits to be completed, the more the company may be required to pay in subscription costs or placement charges to agents or underwriters. That could increase the costs associated with companies’ placement of new shares, which is not particularly desirable.
Even if we do not take that point of view, there is another issue: what will be the sanction if a report is received that is unfavourable and says that something has not been done appropriately? As we have already discussed, the chairman’s ruling in relation to a particular matter is fairly conclusive. If a report is called for there may be some further delay to enable it to be undertaken. If a report is called for after the general meeting has taken place it may be difficult for the expert who has been appointed to provide the report to assess it and conclude whether matters were conducted appropriately.

Jonathan Djanogly: Looking at the clause, that is the crux of the matter: I am not sure how the expert could do that if he was not there.

James Brokenshire: This is clearly an issue. There are provisions that allow the independent assessor to be present if a call for a report has been made before the general meeting, but emphasis is given to the seven-day period after the poll has been taken. I know that that has been stressed by the Government almost as a cooling-off period to allow shareholders to consider properly what they should do and what is appropriate. I can see that argument from one side, but if one allows that it makes it difficult for the independent assessor to properly assess what has taken place because they were not at the meeting.

Jonathan Djanogly: I presume that in order to make that decision we will have to have someone at the meeting who is qualified to make it, so this will be a regulatory measure and add cost.

James Brokenshire: The cost and burden issue is clearly of concern to the industry groups. The comments of the CBI and the Institute of Directors are germane to and support my hon. Friend’s point. It is difficult to assess what evil the provision is designed to cure. Is there a huge demand outside the House for an independent right to make a challenge in this way? It appears to be regulatory and burdensome, particularly as we have debated the operation of section 459 of the Companies Act 1985 in relation to unfair prejudice. That civil remedy may be available if something is prejudicial to minority shareholders. It is difficult to understand what lies behind this provision; what problem it is designed to solve.

David Howarth: It might be difficult for a public company or a company in which it is easy for members to sell their shares to obtain a remedy under section 459. That route would not really help in such a case.

James Brokenshire: I am grateful for that intervention, but the problem is that there is no remedy under this provision either. It does not lead anywhere. There is the right to an independent report, and that is it. It could be open to people to take the reverse approach to the approach that I highlighted initially, when I talked about a delay occurring and companies not implementing a transaction or share offering. People could say, “Well, we’ve got the shareholder consent. We can rely on the fact that the chairman’s view is conclusive and binding. Therefore, we are going to complete the transaction.” It cannot be unscrambled after the event, because no remedy underlies the calling for a report in any event. It is therefore difficult to understand how the provision will operate in practice.

Jonathan Djanogly: In practice, if the meeting is going to be a difficult one, with a lot of points made and many people speaking, people will be put on notice of that, so the registrars will probably send a better team than they would have sent otherwise. The chairman will be on notice, and there will probably be lots of lawyers in the room, who will ensure that things happen. I just do not see how the provision adds anything.

James Brokenshire: My hon. Friend makes a valid point. In practice, for most plcs, the registrars will normally be present at a general meeting in any event to check in shareholders and to check the holding of shares that they have. Therefore, to an extent, there is someone external to the company ensuring that the appropriate procedures are adopted in respect of the way in which votes are undertaken at the general meeting.

Jonathan Djanogly: My hon. Friend is very kind to allow me to make so many interventions. The converse is that if it is a small company, it probably will not have any of that, but it also will not have someone who, under this clause, will be good enough to check on whether things are being done. Therefore, there will be an extra cost, because the company will have to bring such a person in. In effect, it will probably have to bring the registrars in, whereas in the past it would not have had to do that.

James Brokenshire: There is the issue of cost. That point has been made clearly by the groups that I cited at the outset. The noble Lord Sainsbury of Turville said in Grand Committee that
“we believe that the clauses provide sufficient flexibility to avoid imposing unnecessary burdens on companies and that the benefits to be gained in investor confidence justify the new requirements.”—[Official Report, House of Lords, 1 March 2006; Vol. 679, c. GC135.]
I just do not see that. I do not believe that there is the real issue of investor confidence suggested by Lord Sainsbury to justify the provision. It seems too burdensome and bureaucratic and not to have any clear outcome. We believe that, as such, it is unnecessary and should be removed from the Bill. As a consequence, our amendments would delete clauses 325 to 334. Amendments Nos. 207 and 246 would make consequential changes to clauses 335 and 336 respectively.

Margaret Hodge: This is the fourth time that the Opposition have sought to remove these provisions from the Bill. There were three debates on this precise issue that were designed to test opinion in the other place. After the last debate, there was a division that, even though it was in the other place, was lost by the resounding margin of 175 to 128. Nevertheless, the Opposition want to revisit the point again today.

James Brokenshire: I should make it clear that, since that debate, we have received further representations from the Institute of Directors and from the CBI, emphasising that they were deeply unhappy with these provisions. It is entirely appropriate, therefore, for the Opposition to listen to those concerns and reflect them in today’s debate.

Margaret Hodge: Indeed. It is odd how representations go, however, because the Government too have had representations—from active institutional shareholders’ groups, in whose interests these provisions are included in the Bill. Those groups included the Co-operative Insurance Society and Pensions and Investment Research Consultants, who argued that the clauses were appropriate. As Members of Parliament and as members of the Committee, all of us are lobbied on a whole range of issues.

Crispin Blunt: I am reflecting on the logic of the right hon. Lady’s argument. It seems extraordinary that the House of Commons and a House of Commons Committee should be precluded from examining issues because they have been considered up the other end. If the Government accepted every amendment that was made up the other end, I am quite sure we could come to some sort of arrangement, but I am sure that the hon. Lady is not suggesting that.

Margaret Hodge: One reason why the Bill was considered first in the House of Lords was that we recognised, as I hope Opposition Members accept, that this was a detailed and technical Bill, and that there was an enormous amount of expertise in the other place that could properly be applied to examining the necessary detailed amendments. It behoves us, however, to use our time sensibly. On Second Reading the key issue raised by hon. Members from all parties, and on which we want to spend time—though we are getting close on time—was directors’ duties. The more we revisit issues that have been debated, not once but on three separate occasions in the House of Lords, the less time we shall have to deal with the non-technical, fundamental issues that have been raised and which hon. Members from all parties wish to debate.
Mr. Shailesh Vara (North-West Cambridgeshire) (Con) rose—

Margaret Hodge: I am not tempted to give way any further because I want to proceed. I accept that the amendments are properly tabled, but I am not going to debate procedure. There is just a difference of view between the Government and the Opposition on how the time should be used. I hope that Opposition Members will recognise that when sensible amendments are tabled we consider them.

Shailesh Vara: Will the Minister give way on that point?

Margaret Hodge: No I will not. The arguments put forward by the Opposition simply do not stack up. First, they have said that there is no mischief that needs remedying, but that is not so. The company law review recommended a new right for shareholders to acquire an independent report on a poll, and for a good reason. The review received evidence to suggest that the registering and counting of votes was accident prone, and that there were problems between institutional investors executing votes and registrars recording and counting them on behalf of companies.

Jonathan Djanogly: Will the Minister give way on that point?

Margaret Hodge: I will on that point.

Jonathan Djanogly: The Minister makes an important point, but I am not sure that it relates to the way in which the meeting is conducted. There is a problem in the way institutions vote—by the time that votes go through the levels of people who would actually turn up and cast a vote, there can be a problem. That is a different issue, however, from attending and taking the poll at the meeting itself.

Margaret Hodge: That may be the case in some instances. However, an example that was drawn to my attention was the much-publicised vote at GlaxoSmithKline to approve the directors’ remuneration report, which was defeated by just half a per cent. Those circumstances do not really reflect the way in which institutional investors cast their votes, but it might have been sensible to have had a poll.

Jonathan Djanogly: On that point, the Minister will appreciate that if the vote had gone the other way, it would only have been indicative.

Margaret Hodge: Yes; I accept that. Nevertheless, there may have been a shareholder interest in having a poll on the outcome of that vote. That is my point about shareholder engagement.
Paul Myners’ report, “A Review of the Impediments to Voting UK Shares”, which was published in January 2004 and fully endorsed by a City-wide group of institutional investors, registrars, issuers and other industry bodies, noted the continuing concern that the system for recording proxy votes in company meetings was not as efficient as it should be. The report highlighted a problem with lost votes at Unilever plc, when institutional investors were given instructions to vote and the issuer never received them.
I have mentioned the GlaxoSmithKline case, and there was the case of a directors’ remuneration report at BAE Systems, which Institutional Shareholder Services recommended voting against. The concern was about whether the company had voted the shares, held in American depository receipts where no voting instructions had been given, to ensure that the report was approved.

Jonathan Djanogly: All the Minister’s examples appertain not to the meeting itself but to the passing of votes from the institution to the person who turns up at the meeting. She needs to find better evidence to prove her point.

Margaret Hodge: I do not accept that assertion. The issue that we are debating is whether there ought to be a right to ask for a report on a poll. How that poll is taken, how individuals vote, or whether they vote on behalf of other shareholders are secondary points. The point is whether shareholders in the round are satisfied about the accuracy of the poll-taking.
The independent report of a poll seeks to remedy real mischiefs. The Opposition have asked what value the provisions will add. As many have noted, polls are increasingly used at general meetings, particularly those of listed companies. The provisions enable members to require the company to commission an independent report on the poll. Most polls are conducted by the registrar who acts on behalf of the issuer, so it is important that shareholders in their own right can require that the report on the poll be conducted by a third party. As Paul Myners set out in his report, if we are to have shareholder confidence, a comprehensive action programme is required to address the inefficiencies and obstacles in the process by which votes are transmitted.
The provisions are an important part of that programme, enhancing the confidence in the integrity and effectiveness of the voting process in quoted companies.

Jonathan Djanogly: Who does the Minister think that the third party would be in practice?

Margaret Hodge: Somebody who was appointed and whose business it would be. The appropriate person might be another registrar—not the registrar to the company—with the sort of qualifications to which we have referred. It might be somebody such as a third party with appropriate experience in the conduct of polls.
I get the feeling that in this context, although we will have different debates later, Opposition Members’ concerns are more with the boardroom than the rights of shareholders. That is the strong feeling I get in this fourth attempt to strike out the clauses before us. The Opposition contend that the potential burdens of the provisions outweigh the possible benefits, but it is quite the opposite: the provisions empower shareholders with an additional tool to hold the directors to account. Shareholders are not an external body; they own a share in the company. Those interested in stronger shareholder participation cannot have it both ways. If they support moves to help shareholders exercise their rights, they must also support the right of those shareholders to challenge if it is appropriate.
There is no burden on a quoted company unless the shareholders exercise the right to require an independent report. The cost-benefit analysis in the regulatory impact assessment, to give an indicative cost across the range of companies, suggested a cost of between £350,000 and £4.2 million per annum. That is not an enormous cost across the board.

Jonathan Djanogly: How does the Minister know?

Margaret Hodge: It is obviously an assessment.

Shailesh Vara: On what basis does the Minister come up with those figures?

Margaret Hodge: That is an assessment and an estimate based on one or two independently assessed polls—

Shailesh Vara: Will the Minister give way?

Margaret Hodge: No, I will answer the question. It is an estimate based on one or two independently assessed polls for between 50 and 100 per cent. of the AGMs of the 1,400 or so quoted companies at a cost of £500 to £3,000 per report. I suggest that the hon. Gentleman ought to look at the regulatory impact assessment, which we provide, if he wishes to question whether those costs are accurate. Those costs were laid out when we produced the 2005 White Paper and consulted on the specific issue.

David Howarth: The debate so far turns on the accuracy of a cost-benefit analysis that has to be to some extent speculative, because we have never had a provision like this before. The Minister is right that there is a feeling that there is a mischief to be addressed. She has given some examples, although they were perhaps not exactly on the point. However, there is an accurate feeling that there is a problem with polls and with investor confidence which might grow, especially because the use of polls appears to be increasing. The Government are right on that point.
The Opposition have a legitimate point about precisely how much this will cost. It is legitimate to raise the potential problem of the abuse of the rights that are put forward in these clauses. It seems to me that the only rational way forward is for the Government to undertake to keep the area under review and to come back after an appropriate number of years. The Department should study what happens after four or five years and undertake to come back to Parliament to remove or amend these provisions if they turn out to have caused a higher cost than the cost-benefit analysis has suggested.
This is a perfect occasion to raise the issue of post-legislative review. In these debates in Committee we are bound to make a decision now, but it is always possible to come back to those decisions later. If the Minister could give us an assurance along those lines, I would be happy not to oppose the clauses.

Margaret Hodge: I am grateful for that intervention. All good legislation needs to be constantly reassessed and reviewed; there are a number of new provisions in the Bill, including those that we will come to when we consider shareholder voting rights—the contentious issue that we have kept to the end. If we are proposing anything new, it makes sense to review it. We always keep new provisions under review to test whether they meet their purpose.

Jonathan Djanogly: The Minister is making a point that the clauses are there to right a wrong. Can she explain how the provisions will right the wrong?

Margaret Hodge: I was going to come to that point. The Opposition’s only valid question is whether the procedure is a sufficient sanction when we are also trying to meet another objective of our company law framework, which is to avoid creating uncertainty for companies. We do not want resolutions passed in meetings to be open to challenge; we want companies to have certainty. However, openness is useful in so much of life and in so much legislation. In this case, the facility to make a challenge and have an independent report will provide one vehicle, if not an entirely failsafe one, for the threat of accountability to ensure proper practice in the exercise of polls so that reports on them will rarely be required. Often, opening up to public account and ensuring public accountability is in itself a powerful weapon in ensuring the proper conduct of business.
I say to the hon. Gentleman that without these provisions there is a problem when there is unhappiness and a challenge is made. He might not accept that, but there is certainly a problem of perception. Alternative remedies such as section 459 of the 1985 Act, which was brought to our attention by the hon. Member for Cambridge (David Howarth), would be far more difficult for shareholders to exercise. They would be costly routes—not ones that shareholders would want to take. We are trying to balance shareholder engagement and the interests of a company, and I think that we have got it about right. It is not perfect and I accept that the remedy is not as strong as we would like, but opening up to public account is a sensible way to ensure that companies act appropriately.
The provisions are intended to deliver greater transparency and enhance shareholder engagement, which are corporate governance objectives that we should surely all support. Voting is the bedrock of corporate governance and the means by which companies’ boards are held to account. If we want to encourage more people to exercise their votes we need to empower them with the tools to ensure that their votes really count. I therefore urge hon. Members to allow the clause to stand part of the Bill and I urge the hon. Member for Hornchurch (James Brokenshire) not to press the amendments.

James Brokenshire: This has been an interesting debate. The Minister makes assertions about the Opposition’s contention. It is not the Opposition but the Institute of Directors and the CBI that contend that the provisions are burdensome and unnecessary. The key question was asked by my hon. Friend the Member for Huntingdon (Mr. Djanogly) when he asked the Minister how the clauses on independent reports will right wrongs.

Margaret Hodge: That was my slight concern. I understand that the IOD and the CBI have raised the matter again, which is presumably why there were three debates on it in the House of Lords. Shareholder groups—the Co-operative Insurance Society, Pensions Investment Research Consultancy and others—have expressed the opposite view. The hon. Gentleman has often said that he is in favour of shareholder interest. Is he in fact putting the boardroom before the shareholder?

James Brokenshire: I hear the Minister’s reference, but it is interesting that, as far as I am aware, none of the groups that she has mentioned have made representations to us on the matter. If they felt as strongly as the Minister suggests, I would have thought that they would have done so to explain why they feel the provisions are required. I respect their point of view and the fact that they have made representations to the Department. However, I remain unconvinced that the wrong that has been identified by the groups that I mentioned will be addressed by the cumbersome, expensive system proposed.
The Minister has given an assurance that the system will be kept under review. The problem is that once something like that is in place, it is virtually impossible to take it out. As far as I can see, the provisions will not really cure anything, because at the end of the day there is no remedy and nothing to stop a company from implementing the transaction that might be under question as a consequence of the provisions of the poll. On the contrary, the clause might also lead to delays and uncertainty, and therefore cost to the company.
I would be interested to know whether the additional subscription and placement costs that might be charged to a company for delaying the closing or implementation of the placement were taken into account when the Minister arrived at the figure of £4.2 million in the regulatory impact assessment. I suspect that the figure relates only to the direct cost of having somebody there at the meeting or of conveying a report on the conduct of the poll, and does not take account of the indirect costs that could arise as a consequence of the delay that might be occasioned by a company wishing to await the outcome of the meeting.
I am not persuaded that, on the balance of probabilities and risk, the clause will promote and enhance shareholder participation—which I believe in—and on that basis it is appropriate to test the Committee’s view by pressing the matter to a Division.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 13, Noes 5.

Question accordingly agreed to.

Clause 325 ordered to stand part of the Bill.

Clauses 326 to 334 ordered to stand part of the Bill.

Clause 335

Application of provisions to class meetings

Amendment made: No. 107, in clause 335, page 149, line 41, leave out ‘alteration' and insert ‘amendment'.—[Margaret Hodge.]

Clause 335, as amended, ordered to stand part of the Bill.

Clauses 336 to 345 ordered to stand part of the Bill.

Clause 346

Meaning of “political donation”

Question proposed, That the clause stand part of the Bill.

James Brokenshire: We now come to part 14 of the Bill, which provides the mechanism for the control of political donations and expenditure and the means by which a company can approve the making or incurring of such donations or expenditure.
Clause 346 provides the definition of political donation for the purposes of this part of the Bill. The Law Society is critical of the breadth and uncertainty associated with the definition. It suggests that the lack of clarity in the provisions of part 14 and their enormous complexity impose considerable burdens and costs on companies, especially those with large groups that include overseas companies. It is likely that many companies will continue to pass precautionary resolutions. In this area, according to the Law Society, the Bill can hardly be said to be deregulatory. It requested guidance on exchange rate valuation to assist the valuation of non-sterling donations for the purposes of the Bill.
During the Grand Committee stage of the Bill, Lord McKenzie of Luton said:
“We will consider further in consultation with the Electoral Commission whether additional guidance might be provided to companies on the definition of political donation.”—[Official Report, House of Lords, 1 March 2006; Vol. 679, c. GC144.]
I should be grateful if the Minister could provide an update on the situation and whether further guidance will be provided to ensure greater clarity and certainty of the scope and ambit of the definition.

Margaret Hodge: I have to get my head around this. The funding of political parties is important and clearly something that rightly concerns hon. Members on both sides of the House. I hope that we all recognise during the debate on this set of clauses this afternoon that we are looking at the matter from the perspective of companies and their members, and how and when directors of companies need to obtain authorisation from their members to do something that either subsidises a political organisation or, as clause 347(1)(a)(ii) says,
“is capable of being reasonably regarded as intended to affect public support for a political party or other political organisation, or an independent election candidate”.
The reason for that control is simply to prevent directors from subsidising a political organisation for personal reasons rather than in the interests of the company. Effectively, the question we ask when considering whether to burden a company—I recognise that aspect of what the hon. Gentleman is saying—with a requirement to seek a resolution is simply, “Is there a risk of the directors using the company’s money for their own interests rather than for those of the company?” When considering whether to use company funds directly or indirectly to support a political party, there is a risk that directors will be swayed by their preference rather than the interests of the company. Therefore, I believe—I think we all agree on this—that it is right to regulate in this area. Understanding that, the substance of the amendments—I am slightly unclear whether we are taking amendments, Mr. Bercow.

John Bercow: We are considering clause 346. This is a stand part debate.

Margaret Hodge: I am talking about the wrong clause.

John Bercow: If it would be helpful, I can assure the Minister that it is on the subject of political donations. [Laughter.]

Margaret Hodge: Thank you, Mr. Bercow. My apologies for losing my place this Thursday afternoon. As I now have the answer to the question, the most sensible thing to do might be to answer it.
Lord McKenzie said in Committee in another place that the Government would have discussions with the Electoral Commission about whether it would be appropriate to issue additional guidance on the definition of political donation. I am happy to write to all members of the Committee on the outcome of those discussions, which have not yet been had.

James Brokenshire: I am grateful that we got there in the end, at least in relation to my question. There seems to be a need for guidance, given what the Law Society said, and obviously Lord McKenzie’s comments in Grand Committee in the other place recognised that. It is important that the Minister provides us with at least an update and clarification on what further guidance is to be provided before the Committee concludes its consideration of the Bill so that we can properly assess it while the Committee is still sitting. I am grateful for that further assurance from the Minister.

Question put and agreed to.

Clause 346 ordered to stand part of the Bill.

Clause 347

Meaning of “political expenditure”

James Brokenshire: I beg to move amendmentNo. 311, in clause 347, page 154, line 29, leave out
‘that, at the time of publication or dissemination,'
and insert
‘where the primary purpose at the time of such publication or dissemination'.

John Bercow: With this it will be convenient to discuss the following amendments: No. 312, in clause 347, page 154, line 33, leave out ‘that are' and insert
‘where the primary purpose of such activities is'.
No. 260, in clause 347, page 154, line 38, at end insert—
‘(iii) to persuade a member of either House of Parliament, a member of the Scottish Parliament, a member of the Welsh Assembly or a member of any local authority to take or to refrain from taking any action in connection with their duties either as such a member or as the member of a government or executive.'.
No. 313, in clause 347, page 154, line 40, at end add—
‘(3) For the purposes of this Part, political expenditure does not include activities intended to influence policy making or public debate on issues directly affecting the business or other commercial activities of the relevant company and provided further that such activities have been approved by the company's board of directors.'.

James Brokenshire: We come to clause 347, which provides the definition for political expenditure. It sets out what expenditure incurred by a company would need to be approved in accordance with part 14 to be treated as lawful. The definition in the clause is wide-ranging and includes
“the preparation, publication or dissemination of advertising or other promotional or publicity material”
but notes that the activities must be
“intended to affect public support for a political party or other political organisation, or an independent election candidate”.
The issue is the breadth of the definition. Again, I would like certainty and clarification. It seems that the definition could capture activities the primary intention of which is to achieve some other means and potentially limit the company’s freedom of speech on key issues affecting its business or operations. It is not entirely fanciful to imagine a situation in which a Government policy might seek to limit or curb the activities of a company or area of business.
It may be entirely legitimate for companies in such a situation to exercise their right to object, to highlight to a wider audience why they object and to argue robustly why the Government’s view is possibly wholly mistaken. It is clear that if the Government have made some fundamental error or misjudged the situation, the outcome of the company’s activities could reasonably be said to affect public support for the relevant governing party. One then gets into a debate about whether that outcome was the intention. Clearly, there is a balance to be struck.
The Minister will no doubt argue that it is entirely inappropriate to use shareholders’ money on advertising campaigns that promote policies with which the directors personally agree rather than political policies that will benefit the company, as there is a clear conflict of interest. I note that in her preamble on the previous clause, which may have been intended to be addressed to this clause, she made that point clearly. I entirely agree, and it is right that there should be protections governing such situations that reflect the October 1998 recommendations of the Committee on Standards in Public Life. They were the precursor to the provisions in the Companies Act 1985, which were inserted by way of later amendment.
However, the example that I gave is about political policies that benefit the company and its shareholders and are nothing to do with the personal political predilections of the directors. They directly affect and directly relate to the business interests of the company. My point is that legitimate business operations should not be subject to the burden and cost of an approval mechanism that may result in delay at a critical time in the company’s future and could therefore be damaging to the company’s interests.

Nick Palmer: I take the hon. Gentleman’s point, but let us take a specific example. An oil company might regard a proposed tax on oil as undesirable and wish to campaign against it. Does he not agree that practically anything in public life affects in some way practically every major company, and that we give licence to companies to campaign on virtually anything if we do not require some approval process?

James Brokenshire: The hon. Gentleman makes a valid point that we sought to encapsulate in our amendments. He is absolutely right. The purpose of the expenditure should not be to influence a political party or seek a political outcome in so far as it relates to a partisan issue; in other words, to influence whether somebody should vote for one party or another. That is why we have taken a twin-track approach and provided two amendments that could be viewed in isolation. The first takes a purposive approach; in other words, the positive purpose should have to be that that was the intended outcome, in other words the political outcome. The alternative amendment is amendment No. 347, under which
“political expenditure does not include activities intended to influence policy making or public debate on issues directly affecting the business or other commercial activities of the relevant company”,
provided that those activities have been properly sanctioned in advance by the directors. We are being very focused and saying that a company cannot take an approach willy-nilly and incur political expenditure that is intended to affect the outcome of an election. It must be related to its business activities, which is what the amendments would achieve.
The hon. Gentleman rightly made the point about proper tests whereby a company can ensure that its shareholder interests are protected properly and the directors are not running off on some whim relating to their own political aspirations or feelings. That is entirely appropriate and right, and it is why the existing provisions in the Companies Act 1985 are reflected in the Bill. We certainly agree with the necessity and the importance of that approach. The amendments make it clear that the activities intended to influence policy making or debate must be on issues that directly affect the business or its other commercial activities. There is an additional provision in respect of the board approving the related matter, so that an employee or another person cannot simply incur expenditure and the matter has to be properly considered by the board to give a further level of protection in that regard.

Paul Farrelly: I see from amendment No. 313 what the Conservative Front-Bench spokesman is trying to achieve. The amendment is much too wide. For example, could not a company, when an election was called, highlight the fact thatMr. Smith, the hon. Member for x constituency, supported the policy that affected its business at some stage and then put out a lot of negative publicity that was tantamount to running a negative campaign against that person? That would be the potential effect during an election period. The amendment would strike too wide.

James Brokenshire: I understand the hon. Gentleman’s point, but I argue that that is something intended to affect the support for the political party. The purpose of that action would be to affect the outcome of the election, so it would not satisfy the tests under the purposive amendment nor those in respect of the other amendment. He has made a valid point, but I do not accept his line of argument because the point is covered.

Paul Farrelly: The hon. Gentleman is setting two tests that may, especially during or running up to an election period, come into conflict. There could be one hell of a battle in the courts in some circumstances and a great deal of uncertainty about an election outcome.

James Brokenshire: There are remedies in such circumstances, but I maintain that the amendments recognise the correct point made by the hon. Gentleman about influencing the outcome of an election. It would be entirely inappropriate for a company to use expenditure of corporate money in that way without the proper sanction of its shareholders. Let us be honest: it would still be open to a company in such circumstances to say to its shareholders, “Well, we disagree with the approach that that particular person is taking and seek your sanction for this expenditure.” If there were a particular interest that the company and its shareholders felt strongly about—even on the basis of the protections afforded under existing or proposed legislation with the appropriate shareholder sanction—the company could do that.
We do not want to inadvertently to catch situations when the company is genuinely seeking to have its say on an issue that directly affects a specific business interest. It would seem unnecessarily burdensome in those circumstances. Speed might be important if a business of a company were being undermined, but it should be able to argue and lobby quite firmly about why the Government were wrong on a particular issue. The amendment seeks to address that freedom of speech argument. We do so without cutting across the point that the hon. Gentleman has made. The amendments seek to provide further clarity to help companies in deciding whether an approval resolution is required, and to address the Law Society’s point about unnecessary precautionary resolutions.
I will be interested to hear what the hon. Member for Cambridge will say in relation to amendment No. 260 in the name of the Liberal Democrats. I may have misunderstood, but the amendment seems to cut across the ability of a company to lobby on matters of direct concern to its legitimate business activities. However, that might be acceptable in the context of our amendments, and I shall listen with interest to what he has to say on that matter.

David Howarth: I shall speak to amendment No. 260, the purpose of which is to extend the definition of “political expenditure” beyond the realm of trying to influence political parties and into lobbying as a whole. The purpose of the amendment is to cut across business activities and to raise the issue of whether we should be doing more about lobbying itself—attempting to influence Government policy and votes in Parliament. I suppose that the fundamental issue here is the power of money in politics.
There are three separate reasons for tabling amendment No. 260. The first refers back to the interests of company members: the reputation of the company itself. Company members will have a legitimate interest in political donations by that company. Presumably, if a company were to make donations to a particular political party, its reputation could be affected, especially in this new era of transparency, and the company members might be unwilling to be associated with a particular political view.
Amendment No. 260 proposes merely that lobbying activities can have the same sort of effect on a company’s reputation. For example, if a company with shareholders were to lobby for the loosening of environmental regulation, of social protection or of controls on foreign bribery, its reputation could be affected. That would be of legitimate concern to the members of that company—its shareholders.
I concede that the second point has a wider intent: a more transparent lobbying regime would help to create a market for ethical investment and consumption. Investors who want to invest responsibly and ethically, and consumers who want to act similarly in respect of their purchasing decisions, will want to know about the degree of corporate lobbying. Having more of that sort of information will help to create an ethical market.
The third point is the broadest and concerns simply the effect of lobbying on politics and the economy. The view behind the amendments is that lobbying in itself is not a good thing and that it has a corrosive effect on the political process. Yes, it is legitimate for information to pass from civil society to politicians about the possible effects of politicians’ decisions, but that is not really what is going on. We know that. What is going on are attempts to influence politicians by groups privileged by their economic power.

Paul Farrelly: The success of the university in the hon. Gentleman’s constituency has blessed Cambridge with myriad new, spin-off companies. He must be rushed off his feet. I can well understand his interest in cutting down the amount of post that comes in his mailbag, but is he seriously suggesting that every time a company writes to its Member of Parliament it needs to have a shareholder ballot and a resolution?

David Howarth: The hon. Gentleman should understand that we are not attempting to change the basic structure of the law, which does not require a company to pass a resolution for each act or donation. The basic structure, as the Bill says, is that an authorising resolution is passed. That authorises the activity, which is what we want for this part of the definition of political expenditure as well.
Finally we come to the economic argument for discouraging lobbying. There are attempts at lobbying that genuinely try to reduce the inefficiency of the economy, when a regulation is objectively costly for the whole of society. Economic actors, including companies, may want to bring that sort of regulation to the attention of the authorities. However, I think that is a rare sort of lobbying. Normal lobbying is when one company, group of companies or economic interest is trying to profit at the expense of another. What they are trying to do is to shift burdens from one part of the economy to another.
Let us take the obvious example of taxation. Interest groups lobby for tax breaks, for the reduction of taxation on their particular industry. What is the effect of that, if successful? Well, the tax burden on other parts of the economy will rise or government services will fall. The burden of that lobbying effort on tax falls on other people. The question that we should ask ourselves is whether that is the sort of activity that we should be encouraging companies to engage in, because it is merely shifting money from one part of the economy to another. It is not making anything new.

Nick Palmer: I am not sure that the hon. Gentleman realises just how wide the scope of his proposalwould be.
Like many members of the Committee, I am trying to multi-task a bit, following the arguments in detail while also doing other things. I have here a letter from Greenpeace Ltd, which claims that the UK energy review, the terms of reference for which were published a few months ago, is asking the wrong questions. There are two pages and a substantial document. Now, Greenpeace organises itself as a limited company, because, in order to campaign, it cannot operate as a charity.

John Bercow: Order. The intervention is lengthy. Would the hon. Gentleman bring himself to the gravamen?

Nick Palmer: I apologise. Is the hon. Gentleman aware that the letter would be illegal under his amendment?

David Howarth: A company such as Greenpeace Ltd would have to go to its shareholders and ask for authorisation to engage in lobbying activity. That authorisation would not be difficult to get—the whole purpose of the organisation is to campaign. I am talking about organisations the main purpose of which is economic production, the production of value and wealth. Should we be encouraging them to spend time and resources not on producing wealth, inventing new products or trying to sell them into new markets, but on lobbying Government to shift to those organisations profit, value and wealth produced by somebody else?
Economists talk about such activity as non-productive rent seeking, which is precisely what commercial companies engaged in lobbying do. They look to capture other people’s profits by changing the law. That is why amendment No. 26 is as broad as it is. It covers the legitimate interests of shareholders and legitimate interests in creating a new market in ethical investment, but it also has the economic intention of reducing non-productive lobbying.
The amendment moved by the hon. Member for Hornchurch is a clarifying amendment that would leave the power to decide what to do in the hands of the directors rather than the shareholders. From my point of view, it would not have sufficient deterrent effect. Nevertheless, if my amendment and his were passed, that would result in an interesting legal position: companies would be allowed, if their directors said so, to lobby within their ordinary commercial purposes, but could not go beyond that without a shareholders’ resolution. That is not an intended effect of my amendment, but it would be the effect if both amendments were passed.

Nick Palmer: I apologise again, Mr. Bercow, for anticipating my speech. This debate is genuinely interesting for the way that the amendments face opposite poles of the possible discussion. My heart, which is in the camp of the hon. Member for Cambridge, sinks when I open a letter that turns out to be from the Association of British Insurers or some other lobby group.

Paul Farrelly: Unless it has a cheque in it.

Nick Palmer: Those people never send a cheque.
Increasingly, I also feel that way about some good cause campaigns. They increasingly resemble the negative lobby groups that the hon. Member for Cambridge rightly criticised in that they present a one-sided argument, attempt to raise money from their supporters with biased presentations of the facts and attack alternative points of view with an inappropriate vehemence. It tempts one to feel that the whole business of lobbying is essentially unpleasant and should be discouraged.
Unfortunately, in a free and democratic society, we cannot go far down that road. The problem is that one person’s lobby is another’s rational argument. We do not wish to reach the point where only certain authorised bodies, such as political parties, are permitted to express a view. It seems to me that if we adopted the amendment tabled by the hon. Gentleman, it might have no practical effect. He suggested that Greenpeace could get around it simply through an enabling resolution saying that whenever it wanted to lobby, that would be okay.

David Howarth: The difference would be that such a resolution would not in any way be embarrassing to Greenpeace and would not reveal to the world anything that we did not already know about Greenpeace. That would not be the position with a commercial company.

Nick Palmer: If a commercial company asked its shareholders whether they agreed that from time to time, when they thought it in the company’s interests, they could lobby for or against particular parties, most shareholders might well say, “Go for it.” I do not think that they would find the principle of authorising it embarrassing. They might find authorising a particular campaign embarrassing, but that is precisely the situation in which Greenpeace would be in difficulty—if it had to go back to its members every time it wanted to launch a new campaign.
On the other hand, some Conservative amendments seem to go too far the other way. One person’s lobby is another’s reasoned argument. The problem with the Conservative proposals is that they would leave it up to directors to decide what was in the interests of a company. The court would be likely to decide that if the directors could reasonably argue that they believed that something was in the interests of the company, they would be entitled to spend x million pounds campaigning on it.
We are familiar with wealthy business people who launch campaigns that do not obviously relate to their business interests, such as the bus company director who campaigned on section 28 in Scotland. People have different views on homosexuality, but its relationship to bus companies is obscure. If he had persuaded his fellow directors that section 28 was undermining society to the point that it was difficult to recruit decent bus drivers—which he did not, as this, I think, was a personal initiative—I am not confident that that would have been overturned in court.

James Brokenshire: The intent of the amendment is not a subjective test; it would objectively need to be satisfied and approved by the directors. Therefore, it would not be according to the directors’ whim that they would have to decide whether something was the case, and it would be open to challenge in those circumstances.

Nick Palmer: Yes. I understand the amendment. The hon. Gentleman will correct me if I am wrong, but it would require the directors to be objectively satisfied that something was in the interests of the company. That, however, would still be a matter of opinion.
Again, the hon. Gentleman will correct me if I am wrong, but if the court was satisfied that the directors believed that something was objectively in the interests of the company, it would not regard it as unlawful. That seems to be a genuine problem, because who is to measure objectivity, and in that example, who other than the directors?

James Brokenshire: To clarify, the court would decide. This is an objective test. The objective test means that something is the case. Subjectivity does not come into it. If the directors had persuaded themselves that black was white and that white was black, and they had been wrong on that, the court would uphold the fact that they were wrong.

Nick Palmer: Yes, but in the real world of politics—if that is not a contradiction in terms—things are usually not quite as clear as that. I wonder whether the hon. Gentleman is opening a Pandora’s box for lawyers. Every campaign that might be launched would be challenged in the courts and people would be debating the objective impact of homosexuality on bus companies.

Paul Farrelly: It is interesting to hear the Opposition already talking about the possibility and likelihood of conflict in the courts, which is the point that I made earlier when setting out to oppose the amendment. My hon. Friend will agree that the proposal is drawn so widely that it would be open to the directors of the company to say, as many companies have in the past, “Actually, Labour is bad for our business and the only good Government is a Conservative Government.”

Nick Palmer: Yes, that hideous possibility has crossed my mind.

Jonathan Djanogly: Quite right.

Nick Palmer: The hon. Gentleman says quite right. [Interruption.] There we have it. If we balance free speech with the need for accountability, we end up with what, by a curious coincidence, we have in the Bill, which is the fact that, yes, companies are free to express their issues of business, but, yes, they have to get the agreement of their shareholders to do so. That seems to be a reasonable balance.

Crispin Blunt: The hon. Gentleman was on rather better ground when he was making a case against amendment No. 260. I thought that that became clear, although he has convinced himself of his own arguments. The remark that the hon. Member for Newcastle-under-Lyme (Paul Farrelly) put on the record, however, will bear repeating.
On the basis of my experience—like you, Mr. Bercow, I was elected on 1 May 1997, which, in the absence of my hon. Friend the Member for Grantham and Stamford (Mr. Davies), makes me a rather long-serving Member—I point out to the hon. Member for Cambridge that to present lobbying and Government relations in the way that he has is rather wide of the mark.
Reflecting on my experiences of companies that have had to bring issues to me, I shall give an example. A company made pharmaceutical products for animals that were going to be banned under a proposed European Union regulation. The company was responsible for distributing the products throughout the United Kingdom. They were absolutely essential to its business, and it came to me to approach Ministers who were going to the key European Union meetings.
That had to be done at speed, as—inevitably—the company became aware of that central threat to its business only rather late in the day. No doubt it did not belong to a powerful lobby group, although perhaps it should have, that would have professionally represented its interests in Brussels and ensured that those arguments were made early.
It came to a Member of Parliament to put the case to a Minister of the Crown so that the Minister of the Crown, representing the United Kingdom at a European Council meeting, could put arguments on behalf of what was represented as a key United Kingdom economic interest. It was certainly an important economic interest in my constituency.
That is much more characteristic of the relationship between companies and Members of Parliament than the picture that the hon. Gentleman gave. If his amendment would require such a company to get a shareholders’ resolution to talk to its Member of Parliament, it is an absolute disaster that should be avoided.
We ought to understand that, in the main, Government relations—lobbying, if one wants to call it that—represent a necessary activity. Companies face huge complications in the enormous area of relations with the Government. As with any other aspect of company business, whether it be accountancy or the law or anything else, companies of a certain size are well advised to take professional advice in dealing with the Government.
People who know how to deal with the Government—which Departments to go to and which official in each Department, which Minister to press and which levers to pull to effect the necessary outcome for their businesses—and who could be unintentionally affected by Government regulation should not be required to approach their shareholders to achieve that.

David Howarth: It is possible under clause 359 for the Secretary of State to make exemptions for very small amounts of expenditure. The amendment would catch expensive, powerful campaigns. When we get to that clause, I will say more about how it works, but it is there to prevent excessive use of the powers.

Crispin Blunt: There are occasionally expensive and necessary interests that must be represented. The hon. Member for Broxtowe said that his heart sank when he received something from the Association of British Insurers. The insurance industry is a vital part of our economy, and it is in our interests that British insurance companies should be able to succeed overseas. Governments of all persuasions have spent an inordinate amount of time trying to open overseas markets to British insurance companies so that the financial services that are such a key part of our economy can succeed.
Those are massive interests. It is all right for the Secretary of State to say that they can spend whatever the limit is, but I am afraid that for the scale of the interests at stake we are talking about campaigning worth hundreds of thousands of pounds, which might be a perfectly reasonable sum to spend in trying to advance interests worth many billions to the United Kingdom.

Nick Palmer: To clarify, I do not object in principle to hearing from the Association of British Insurers. The problem is that it and similar organisations tend to lobby on a one-sided and unhelpful basis. I suggest to the hon. Gentleman that, before he takes up too enthusiastically the role of the lobbyists’ friend, he should consider whether getting biased and one-sided interventions from such lobbyists is really the best way to organise our public life. However, I do not know what the alternative is.

Crispin Blunt: I am grateful to the hon. Gentleman for admitting that he does not know the alternative.
Any company needs to make a decision when approaching the Government or Members of Parliament as to whether the function will be in-house or one carried out by companies out of house. Given the complexity of a company’s interactions with Government, one cannot escape from many cases having to be conducted on a professional basis. The bigger the company, the larger the interests at stake.
We are deluding ourselves if we suddenly think that an inherently bad thing. Companies getting their interests professionally represented or presented to Government is an inherently good thing. Whether that is done in-house by the companies or out of house is entirely a commercial matter for them. The Government relations of companies is a necessary evil.
For Ministers of the Crown to represent the interests of United Kingdom companies as effectively as they can is in our favour, because we are all here to try to protect their interests. The wealth that we tax here and the resulting expenditure all come from the success of such companies. If I can advance the interests of the Association of British Insurers, most particularly in overseas markets, I am absolutely delighted to do so. If it writes to me and asks how I can do that, I will be only too pleased to assist, because that is of assistance to the United Kingdom.
When one gets self-evidently self-interested lobbying, which is what the hon. Member for Cambridge and others are driving at, most of us can recognise when one interest is being played off against another. That lobbying is normally and properly ineffective, as one might expect.

Paul Farrelly: For the record, the deep recession from the late 1980s until the mid-1990s was a salutary lesson to the more rabidly right-wing-led companies. Looking now at the Chancellor’s stewardship of the economy, a Conservative Government were not necessarily always good for business compared with a Labour Government. I hope that the hon. Gentleman will graciously agree.
My point is that for some such companies it would be quite possible with the setting up of the two tests for a company—for which we will take a fictitious name, Belize Telecom UK Ltd.—to drive a coach and horses through the safeguards in other parts of the clause by setting up an alternative test, which would be destined for the courts.

Crispin Blunt: Imagine what will happen if I get driven down the line of the golden economic inheritance to the Chancellor and what his officials said to him when he took office, which was that the figures were so good they were unbelievable—

John Bercow: Order. The hon. Gentleman’s imagination is correct.

Crispin Blunt: I am grateful for that confirmation, Mr. Bercow.
To conclude, I fear that amendment No. 260 goes much too wide to win support. Presented as it was by the hon. Member for Cambridge, it betrays an unfortunate and unnecessary cynicism about the necessity of Government relations today, given the complexity that companies face.

John Bercow: As we have been sitting since 1 pm, I shall adjourn the Committee for 10 minutes for a comfort break. We shall resume proceedings at 4.14 pm.

Sitting suspended.

On resuming—

Margaret Hodge: I start by raising something that nobody has mentioned, but which is helpful for setting the context of where we are going. We have incorporated a few deregulatory measures into our propositions. For example, we have removed references to the general meeting, to make it clearer that private companies can authorise donations and expenditure by written resolutions. We have also said that a holding company must authorise a donation or expenditure by a subsidiary company only if it is a relevant holding company—that is, the ultimate holding company or, where such a company is not a UK company, the holding company highest up the chain.
Holding companies are now also permitted to seek authorisations of donations or expenditure in respect of the holding company itself and one or more subsidiaries, including wholly owned subsidiaries, through a single approval resolution, as per clause 349(1). Companies are also permitted to table separate approval resolutions in respect of donations to political parties and donations to other political organisations, as per clause 349(2). There has been some deregulation to simplify procedures, and I hope that that is generally acceptable.
I agree with my hon. Friend the Member for Broxtowe (Dr. Palmer) that the group of amendments represents the two extremes of the spectrum. Despite his protestations to the contrary, the hon. Member for Hornchurch is introducing a subjective element into what would otherwise be an objective test. In an earlier exchange, he appeared to think that the element he proposes would be objective because the matter would be resolved by the courts. Clearly, we want to minimise the occasions when things are taken through the processes of the courts, but the subjective test that he is trying to introduce would increase the amount of litigation. That is not where we want to be at all. We want a simple, direct and objective scheme.
It is always difficult to respond to examples as they are raised. However, the circumstances outlined by the hon. Gentleman, who thought under our objective test it would be inappropriate for a company to spend money on planning permission—I cannot remember his precise example, but it was something of that sort—would not be considered as political expenditure under that objective test, so he set up a false example.
Who would decide the primary purpose under the terms of the amendment? Where would the distinction between the primary and non-primary purposes lie, and who would take that decision? The directors would have to judge subjectively whether the primary purpose of any expenditure could reasonably be regarded as intending to effect public support for political parties, organisations or candidates. I have sat and listened carefully to the debate, and such judgments are, by their nature, complex and nuanced. As we heard, they unquestionably carry the risk of allowing directors to put their personal political preferences ahead of the economic interests of the company.
The clause as it stands includes a test for judging whether the directors of companies ought to go to their members for authorisation before committing expenditure. It would be foolish to enable directors to avoid going to their company’s members, which would be the purpose of the hon. Gentleman’s tests to approve a donation based on the directors’ subjective judgment of its being non-political. That would increase the risk of directors using the company’s money as if it were their own. I hope that the hon. Gentleman accepts that our test would be better.
Amendment No. 260 is at the opposite end of the spectrum. The hon. Member for Cambridge seemed to be in favour of abolishing the Department of Trade and Industry.

David Howarth: That is our policy.

Margaret Hodge: And it is my job. The hon. Gentleman is welcome to come and sit in my office for an hour or two. He will see that my position as a member of the Government is very much about hearing representations from companies on a range of matters in which we might have an influence, either in domestic or European legislation, or beyond. There is a huge difference between the facility to hear those representations made through lobbying and the judgment that we have to make, whether we are in government posts, are MPs or sit in elected positions in local authorities or elsewhere.
I was trying to think back to my education, a long time ago, and if politics is the marketplace of interests, we have to allow those interests to have a voice if we are to make sensible decisions. Throughout my political career, however irritating occasional lobbying can be and however partial it might be—of course, it can be partial—hearing the experience and views of those who will be most immediately affected by actions that we take either in government or elsewhere, is crucial to ensuring that we take decisions that are in the best interests of either those companies or their role in the wider economy. The hon. Gentleman goes too far. There is legitimate lobbying of councillors, MPs and Ministers which is essentially non-party political. In a common-sense way, we all comprehend that in our day-to-day work.
We are not attempting to control what directors say. A director can go on to the “Today” programme and put whatever view he likes on whatever issue he likes. The control that we are trying to introduce, which is perfectly proper, is that a director does not commit the company’s funds in pursuance of his own views on an issue, particularly in relation to a political party or political interest.
Amendment No. 313 provides that the board of directors of a company—in other words, a quorate meeting of the full board, rather than someone acting under delegated authority—could commit political expenditure without prior shareholder approval if that expenditure is intended
“to influence policy making or public debate on issues directly affecting the business or other commercial activities of the company”.
Perhaps the hon. Member for Hornchurch will come back to this, but I have difficulty understanding what political expenditure a company commits that could not be argued was
“to influence policy making or public debate or issues directly affecting the business or other commercial activities of the company”.
The amendment provides that the directors of a company could collectively commit any amount of unauthorised political expenditure. It is self-evident that such a state of affairs increases the risk of directors using the company’s money in their own interests. Recognising that, I hope that the hon. Gentleman will not feel it necessary to press the amendment to a Division.
In conclusion, the Government have got it about right. We heard the two extremes of the argument; we sit somewhere in the middle—the usual third way.

David Howarth: I accept the concept of the marketplace of ideas, but I do not think that one’s voice in that marketplace should be proportionate to one’s economic power. The purpose of the amendment is to open the door to controlling that power. Information flowing to the Government is obviously a good thing, but that is not the same as putting pressure on the Government by commercial interest. If the opportunity arises, I would like to test the Committee’s opinion on amendment No. 260.

James Brokenshire: We have had an interesting debate on the political side of things and on the funding of political parties, and we shall have more in the context of other amendments.
I disagree strenuously with the Minister’s allegation that the Opposition’s proposal is in any way extreme. It was intended to provide clarification of wording that I think is uncertain—to clarify what is meant by expenditure
“capable of being reasonably regarded as intended to affect public support for a political party or other political organisation, or an independent election candidate”.
Contrary to what has been suggested, it was not intended to drive a coach and horses through the entire set of provisions. I note the comments of the hon. Member for Broxtowe, but I do not accept his suggestion that our amendments, as tabled, would allow partisan political funding.
It is important that the legislation contains protection to avoid conflicts of interest in which directors might otherwise seek to use company funds for partisan interests of their own, rather than in the company’s best interests. I maintain, however, that the amendments properly recognise that need and protect against such situations.
We debated subjectivity and objectivity. Had I wanted there to be some sort of subjective test, I would have drafted the amendment so that the test was that of the directors’ view on the company’s best interests. I did not seek to do that; I kept the language objective. As to my reference to the court, the meaning of all provisions of the Bill will ultimately be decided by the courts, so I do not accept that the amendments would cause any additional litigation. Indeed, our proposals would avoid the potential for disputes going to court, because the existing language is quite wide, woolly and uncertain, and may cause disputes as to its effect.

Margaret Hodge: We will have to disagree on that, but I ask the hon. Gentleman who, other than the directors of a company, would judge the primary purpose.

James Brokenshire: The directors would obviously have to determine what they believed to be the purpose—it would be a decision for them. The ultimate test, however, is not whether their decision was right, but whether there was an intent aimed at influencing policy or debate on issues directly affecting the company. That is clearly an objective test. Directors will reach their decisions, but it will have to be on that objective basis.
My hon. Friend the Member for Reigate (Mr. Blunt) made a valid point on the comments of the hon. Member for Cambridge about the relationship between companies and politicians. My hon. Friend cited a powerful example of the need for speed of representation. The complexity of companies’ interaction with the Government means that an ongoing relationship is needed between business and the Government to ensure that the Government properly uphold and represent business interests—as well as all other interests—in acting in the best interests of the country as a whole.
I have already addressed some of the points made by the Minister. I still maintain that the question is one of clarification and that there is already confusion on the intent of the clause. The amendment seeks to provide further clarity rather than to confuse the matter. However, I hear what the Minister has said, and I note that she is entrenched in her position and is not prepared to give ground. I was delighted to hear, however, that she is still adopting a third way; it is great that the Blairite vision is still very much in evidence on the Front Bench. However, in light of her comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 260, in clause 347, page 154, line 38, at end insert— ‘(iii) to persuade a member of either House of Parliament, a member of the Scottish Parliament, a member of the Welsh assembly or a member of any local authority to take or to refrain from taking any action in connection with their duties either as such a member or as the member of a government or executive.’.—[David Howarth.]

Question, That the amendment be made, put and negatived.

Clause 347 ordered to stand part of the Bill.

Clauses 348 to 351 ordered to stand part of the Bill.

Clause 352

Liability of directors in case of unauthorised donation or expenditure

James Brokenshire: I beg to move amendment No. 314, in clause 352, page 157, line 5, after first ‘a', insert ‘wholly owned'.
The clause makes provision regarding the liability of directors in the event that a company makes a political donation or incurs political expenditure without the authorisation required by part 14. In those circumstances, the directors in default are jointly and severally liable to make good to the company the amount of the unauthorised donation or expenditure, with interest, and to compensate the company for any loss or damage sustained as a result.
When the company in default is a subsidiary, the directors of the ultimate holding company are also potentially liable. As such, the provision will pierce the corporate veil of the subsidiary company and make other people liable for the defaults of the relevant company. Obviously, that approach requires caution. That provision was introduced into the Companies Act 1985 and then reflected in the Bill on the basis of control between the board of the holding company and that of the subsidiary. The interests of the shareholders of the holding company might be adversely affected or prejudiced without that protection.
The existing Companies Act, however, provides an important limitation. Section 347F7(a) of that Act states that liability shall not arise if
“the subsidiary is not a wholly-owned subsidiary of the holding company”.
That important qualification is not reflected in clause 352(3)(b)(i) of the Bill, which states merely that the defaulting company has to be a subsidiary. That approach exposes the directors of any holding company to the risk that they will be liable to compensate a subsidiary over which they might not have direct control.
It is not impossible to imagine a situation in which company A holds a 51 per cent. interest in company B, but does not control the board of company B. Section 736 of the Companies Act states that a company is deemed to be a subsidiary of another if it is a member of it and controls the composition of its board of directors or holds more than half in nominal value of its equity share capital. Therefore, even though company A is unable to control the activities of company B, company B could still incur an unauthorised donation, and the directors of company A could be liable to compensate company B even though they were not party to or able to stop the payment of such a donation. Similarly, the provision makes no allowance for the proportion of the shareholding held, so while the holding company is only a 51 per cent. holder of the shares, its directors are liable for 100 per cent. of the compensation.
In Grand Committee, Lord McKenzie said:
“If we bind that top UK-holding company into the processes, it seems fair that the directors are held to account if they fail to do that.”—[Official Report, House of Lords, 1 March 2006;Vol. 679, c. 153.]
Yet that is not what the 1985 Act does. It draws an important distinction between the approvals mechanism and the sanctions provisions in respect of non-wholly-owned subsidiaries under section 347F(7)(a). The existing Companies Act clearly recognises that it may not be possible for a director of a holding company to procure compliance by a non-wholly-owned subsidiary. The logic was right when it was introduced. It is right now, and it should be reflected in the Bill, too.

Margaret Hodge: I want to make two points about the amendment, the first of which is legal argument. The definition of “subsidiary” under section 736 of the 1985 Act essentially defines a subsidiary as a company controlled by a holding company by virtue of the fact that the holding company controls the majority of its voting rights or has the right to appoint or remove the majority of its board of directors. Therefore, in many cases—indeed, most—the directors of a holding company will control the voting rights that the subsidiary needs to pass a resolution approving a political donation and, if not, will have control of the board.
I understand that the definition of “subsidiary” is slightly different in relation to the accounts and reports provisions, and that may have given rise to some misunderstandings about the potential liability of the directors of a holding company if a subsidiary makes an unauthorised political donation. I reiterate that, for the purposes of the political donations provisions that we are discussing, unless a company’s voting rights or board of directors—or both—are controlled by the holding company, it is not considered a subsidiary.
The second point relates to the underlying policy intention of the clause, which is to ensure that if, for example, the directors of a holding company use the controlling voting rights that they have in a subsidiary to pass a resolution authorising the subsidiary to make a political donation without an authorising resolution from the members of the holding company, they, as well as the directors of the subsidiary, are liable.
Amendment No. 314 would mean that the directors of a holding company would not be liable for an authorised political donation if the subsidiary was not wholly owned, when none the less they controlled a majority of voting rights of the board or the subsidiary. In our view, that would weaken a sensible and necessary provision, which is why we oppose the amendment.

James Brokenshire: I am grateful to the Minister for setting out the position. She has reflected what I said initially about the subsidiary. The key matter is that the proposal is a change from the 1985 Act, which recognised the distinction of the wholly-owned subsidiary and limited the remedies in that way. Can she explain what problems have occurred since the Act was introduced to justify the change in policy?

Margaret Hodge: I can write to the hon. Gentleman if we have information about that, but I assume that during the company law review such issues were considered. I wish to give him one more piece of information that I think might help him. Worries that have been expressed about the lack of safeguards for directors of holding companies, if they have no controlling practice of the subsidiary, are dealt with under subsection (3)(b). That provides that directors will not be liable if, having taken all reasonable steps, they could do nothing to prevent the donation. This is a sensible set of propositions, and I hope that the hon. Gentleman will withdraw the amendment.

James Brokenshire: I thank the Minister for her explanation. In large part, she reaffirmed what I was saying. There is a potential issue of liability for directors of the holding company. It certainly appeared to be important in the 1985 Act to maintain the distinction between a wholly-owned subsidiary and a subsidiary in which there was only a 52 per cent. holding. I believe that that original distinction was drawn to highlight and address some of the potential risks that I mentioned in my comments on the clause.
I note that the Minister is not willing to give ground on that point, and although I think that it is a valid issue that deserves further examination and consideration to ensure that we are not creating inadvertent problems or issues as a consequence, I am minded not to press the amendment to a vote. I shall certainly listen with interest to any further representations that the Minister might wish to make.

Margaret Hodge: The only thing that I want to say to help the hon. Gentleman is that once I have written to him, he can make a decision on whether he wants to raise the issue again on Report.

James Brokenshire: I am grateful that the Minister has agreed to write to me. If that letter could be written before the conclusion of our consideration in Committee, I would be grateful, as that would mean that as a Committee we could at least hear the results of that. I am gratified by the points that she has made and by the fact that she is prepared to write to me. In the light of that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 352 ordered to stand part of the Bill.

Clause 353

Enforcement of directors’ liabilities by shareholder action

James Brokenshire: I beg to move amendment No. 315, in clause 353, page 158, line 16, at end insert
‘or, in the case of a claim under section 352(3), to the relevant subsidiary;'.

John Bercow: With this it will be convenient to discuss the following amendments: No. 316, in clause 353, page 158, line 18, at end insert
‘or, in the case of a claim under section 352(3), by the relevant subsidiary;'.
No. 317, in clause 353, page 158, line 20, at end insert—
‘(d) that a resolution satisfying the provisions of sections 348 and 349 has been made in connection with the relevant political donation or political expenditure.'.

James Brokenshire: The clause provides a mechanism for shareholders to bring proceedings to enforce the liability of any person under clause 352 in the event of an unlawful political donation being made or if unlawful political expenditure is incurred. Subsection (4) provides relief from liability in certain circumstances, including if the unauthorised amount has been made good to the company or if proceedings have been brought by the relevant company.
Amendments Nos. 315 and 316 are probing amendments, as subsection (1) talks about proceedings being enforced by the company. When holding company director action might apply, I want to be clear whether the reference to the company means the company that has incurred the illegal donation or expenditure, the holding company or both alternatives. If the latter two constructions are applied, the directors of the holding company should be granted relief if an action is diligently pursued by the subsidiary or if the sum is made good to the subsidiary as contrasted with the holding company.
Amendment No. 317 raises a different issue, and confirms that ratification of an action by shareholders will provide relief. Obviously, under section 347C(5) of the 1985 Act, ratification is not allowed. I note that that section is not incorporated here, and therefore the view is that ratification is, by the omission of such provisions, permissible. That certainly is the intended effect of the provisions. The amendment was intended to put clarification on the face of the Bill, given that the clause is a reversal of the pre-existing situation, and to make the position absolutely clear.

Margaret Hodge: I am grateful to the hon. Gentleman for bringing amendments Nos. 315 and 316 to our attention. We should like to reflect on and return to the issue that he has raised. He rightly said that clause 352 imposes a liability on the directors of the subsidiary donor company and its relevant holding company. Clause 353 gives conduct of legal proceedings to enforce the liability to members of the company. In that case, “the company” means the donor company, not the relevant holding company. However, if the company is a wholly owned subsidiary, it will not have any members with an interest in pursuing the action. Accordingly, the action must be capable of being brought in the name of the donor company by members of the relevant holding company, and, arguably, by members of any intermediate holding company, too.
Although we cannot accept amendments Nos. 315 and 316 as drafted, we accept their intent, and I am happy to undertake to table amendments on Report to address the issue that the hon. Gentleman has drawn to our attention.
I am not sure whether I am right or wrong, but with amendment No. 317 it seems that the hon. Gentleman would like to provide for a director to apply to court when there had been an authorising resolution, so as to prevent the bringing of a shareholder action relating to an unauthorised political donation. If there is an authorising resolution, the political donation cannot be unauthorised. I do not know whether there was a drafting issue, but the amendment does not make sense, and he may want to consider that.

James Brokenshire: I am grateful to the Minister for accepting that, with the first two amendments, there is a legitimate issue that deserves further examination. I am grateful to her for agreeing to table on Report amendments to address that position. I note her comments about amendment No. 317. My approach was to highlight the ratification issue that I discussed. If I have inadvertently drawn any conclusions in relation to that, I apologise to the Committee. In light of those comments and the Minister’s assurance about amendments Nos. 316 and 316, I beg to ask leave to withdraw the lead amendment.

Amendment, by leave, withdrawn.

Clause 353 ordered to stand part of the Bill.

Clauses 354 and 355 ordered to stand part of the Bill.

Clause 356

Trade unions

James Brokenshire: I beg to move amendmentNo. 219, in clause 356, page 159, line 30, leave out subsection (1) and insert—
‘(1) Subject to the exemptions in subsection (5), a trade union is a political organisation for the purposes of this Part.'.

John Bercow: With this it will be convenient to discuss amendment No. 220, in clause 356, page 159, line 33, at end insert—
‘(3) In addition to the other requirements set out in this Part, a donation may only be made to a trade union if such trade union currently has in force a political resolution authorising the trade union to apply its funds in the furtherance of political objects and such political resolution authorised donations or expenditure under one or more of the following heads—
(a) donations to political parties or independent election candidates;
(b) donations to political organisations other than political parties; or
(c) political expenditure
in each case up to a specified amount in the period for which the resolution has effect.
(4) For the purposes of subsection (3), “political expenditure” shall have the meaning set out in the Trade Union and Labour Relations (Consolidation) Act 1992 (c.52) and “political resolution” shall have the meaning set out in the Trade Union and Labour Relations (Consolidation) Act 1992 (c.52) save that the reference in section 73(3) of that act to “ten years” shall be deemed to be “four years”.
(5) A donation to a trade union shall not be a political donation for the purposes of this Part to the extent that it is made—
(a) to provide or facilitate the provision of education and training of employees of a relevant company;
(b) to assist the trade union in representing employees of a relevant company;
(c) to assist the trade union in consulting with and meeting employees of a relevant company;
(d) to facilitate the investigation of any matter relating to the terms and conditions of any employee of a relevant company;
(e) to assist or to facilitate negotiations between the trade union and a relevant company and any of its representatives in connection with any complaint or dispute between the company and its employees (or any of them); or
(f) to otherwise promote good employment relations between a relevant company and its employees.
For this purpose a relevant company includes the company by which the donation was made, any holding company of the company by which the donation was made, any subsidiary of such holding company or any subsidiary of the company by which the donation was made.'.

James Brokenshire: We now turn to the treatment of trade unions for the purpose of the Bill. As I understand it, the exemption incorporated in this clause is that trade unions are not to be regarded as political organisations for the purposes of the Bill. The exemption is based on uncertainty about whether the provision of company rooms for trade union meetings, the use of company vehicles by trade union officials and paid time off to trade union officials could be construed as a political donation requiring an appropriate shareholder approval.
It is entirely appropriate for companies to support trade unions. Trade unions play an extremely important role in representing and supporting employees and their interests in a range of fields, whether pay and conditions, safety, resolving disputes when an employee may have been treated inappropriately by their employer or supporting employees who have been injured at work or contracted illnesses as a consequence of their work-based activities. They also undertake the essential role of supporting the personal development, education and training of their members and generally promoting good working practice. Companies should be able to facilitate such activities and it is right that the Bill should seek to ensure that such support can be provided without the need for a cumbersome approval process. I am concerned that excluding trade unions from the definition of “political organisation” would go much further than that.
The history of trade unions is inextricably linked to political activity, and the connection is maintained today. The comments of the chairman of the Labour party, the right hon. Member for Salford (Hazel Blears), are germane. She spoke to the BBC on 18 June on the issue of party funding and defended trade union backing of the Labour party. She said:
“There is a view that trade union donations include affiliation. I think there is a very strong argument that affiliation fees are actually the aggregate membership of millions of people who want their trade unions to be collecting for us in the way they have been for over a hundred years.”
She added:
“There is a lack of understanding about the way in which certainly our party is a federal organisation of different kinds of membership and that organisations are members in themselves.”
That line of argument seems to affirm that trade unions, or at least some of them, are an important structural part of the Labour party—a political party. From the conceptual perspective, therefore, I find it extraordinary for the Government to state in the Bill that it is impossible for a trade union to be regarded as a political organisation, when the chairman of the Labour party appears at the same time to be saying that unions are an integral part of the party’s political superstructure.
The current wording of the clause would make it entirely possible for a company to make a donation to a trade union that is then passed directly on to a political party of whatever colour. Such a donation would be exempt from the protections afforded to shareholders even though it might have been made in the knowledge that it was to be used by a political organisation. It would thereby bypass the protections that would otherwise cover such a situation.

Kitty Ussher: What is the hon. Gentleman’s response to the TUC, which says that if a trade union accepts a donation from an employer for such a purpose it will lose its certificate of independence, which it is desirable to have?

James Brokenshire: It is interesting that the hon. Lady refers to the status of a trade union following the TUC’s representations to the Better Regulation Task Force, which said:
“It is often forgotten that trade unions are employers themselves and businesses. As such they experience the same problems as other businesses of keeping up with employment law changes.”
It therefore draws direct parallels between companies and trade unions. That is why amendment No. 219 would delete subsection (1), but only on the basis of exemptions that would be granted under proposed new subsection (5), which would be inserted by amendment No. 220.
The comments of the right hon. Member for Salford also drew a distinction between affiliation fees and political donations made by a trade union, seeing the former as being collected almost on behalf of the party, unlike the more general donations that a trade union might make. That leads us to the other aspects of the additional wording proposed in amendment No. 220.

Kitty Ussher: With due respect, although it is of course true that trade unions are employers, I am not sure that the hon. Gentleman answered my question. No trade union would want to be a post box for a donation from a company to a political party because it would lose its certificate of independence.

James Brokenshire: There is still an argument for displacement and room for doubt on the matter. The fact that the TUC holds that view does not detract from the more general line of argument that I am adopting and the need for clarity. However, the hon. Lady correctly highlights the issue of how funds are used and how funds that go from, say, a corporate organisation to another organisation might be appropriately treated. That leads on quite directly to the second part of the amendments.

Jonathan Djanogly: I must ask the basic question. If £1 comes in from a company for educational purposes, presumably that is £1 that the union will not have to spend itself and £1 that it could provide for political purposes.

James Brokenshire: That is a fair point in the displacement argument, hence the reason for ensuring that proper and appropriate protections cover such a situation.

Kitty Ussher: Does the hon. Gentleman not agree, with regard to answering the intervention from the hon. Member for Huntingdon, that it is ultra vires for trade unions to make any sort of transfer from their general account to their political account?

James Brokenshire: I still take the view of my hon. Friend the Member for Huntingdon in terms of the displacement argument. There is still a risk that money will be used in the manner that he highlighted.
Hon. Members will be aware that the legislation on trade union funds is now in sections 71 to 96 of the Trade Union and Labour Relations (Consolidation) Act 1992, the history of which dates back to the Trade Union Act 1913. That established the concept of a union having to establish a political fund, with the ability of an individual member to contract out of a political levy. The Trade Union Act 1984 extended the ambit of the legislation to cover “political objects”. Under the current legislation, political fund review ballots must be held every 10 years to ensure that members wish their political funds to continue.
There are clear parallels with the provisions before us in the context of companies, with unions being required to obtain the consent of individual members in respect of the use of funds for political activities. The Department of Trade and Industry said in its consultation document, “Review of Employment Relations Act 1999”, in the context of any possible reform of the arrangements:
“The Government understands the case for reform. However, these ballots serve an important democratic function and ensure that union members can at regular intervals collectively authorise their union’s involvement in political activities.”
That is right, and the same logic applies to the approval mechanism set out in part 14 of the Bill if a company wishes to make a political donation or to incur political expenditure, so that the members of the company—its shareholders—are given the right to approve the use of company funds for political purposes.
I believe that there should be more broadly equivalent treatment in terms of the permissions required by both companies and trade unions in relation to political donations and expenditure generally, but that wider debate would not be in order in the context of the Bill. However, amendmentNo. 220 would provide that if a company wished to make a donation to a trade union other than for the purposes set out in subsection (5), it would need to be satisfied that the relevant union had obtained an approval from its members that was similar to the one the company would have obtained from its members. The amendment would harmonise the approval regime between companies and trade unions in relation to political donations and expenditure, at least in so far as funds are received from companies.
It is right that a company should have to seek the approval of its members to make a donation to, or to incur expenditure for, a trade union in its wider political capacity. It is right that a company should be able to support unions in their essential role in promoting the interests of the employees of the relevant company without unnecessary burdens. It is also right that a union should require the consent of its members to apply the funds given to it for wider political purposes, just as a company would be so required, with a resolution at least every four years.
Our amendment would give effect to that approach and would be an important step forward in terms of creating equivalent treatment between companies and trade unions in the context of political activity. Both have members, who should be protected in the same way.

Paul Farrelly: The intention behind the Conservative attack on trade unions through the requirement to stage repeated ballots was well known and it has been roundly defeated, because in almost every instance members of trade unions have voted in favour of keeping political funds. The contortions, convolutions and hypothetical fantasies that the hon. Gentleman is now outlining seem to be yet another attack by the Conservative Front Bench on trade unions across the board.

James Brokenshire: Not at all. This is not an attack on trade unions. The amendment that we have tabled reflects the importance and value of the work undertaken by trade unions by recognising all their work on education and training, representing employees, consulting employers and the relevant company and facilitating good industrial relations. All of those are recognised in the amendment and would not require any special consent from either the company or the union. The amendments properly reflect that while drawing direct parallels, as the Government’s own Better Regulation Task Force recognised the similarity of companies and trade unions in many respects.
Debate adjourned.—[Steve McCabe.]

Adjourned accordingly at one minute past Five o’clock till Tuesday 4 July at half-past Ten o’clock.